SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended DECEMBER 31, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-5439
DEL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-1953103
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(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
178 EAB PLAZA, UNIONDALE, NY 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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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $1 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes [X] No [ ]
The aggregate market value of the Common Equity of the Registrant as of the last
business day of the most recently completed second fiscal quarter was
$216,497,925. The aggregate market value of the Common Equity held by
non-affiliates of the Registrant as of the most recently completed second
quarter was $102,720,375. On such date, the closing price for the Common Equity
was $25.00 per share.
The number of shares of Common Stock outstanding as of March 24, 2003 was
9,141,306 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
Part of the Form 10-K into
which the Document is
DOCUMENT INCORPORATED
Definitive Proxy Statement for 2003 Annual Part III, Items 10, 11, 12 and 13
Meeting of Stockholders
Part I
Item 1 - Business
Del Laboratories, Inc. (the "Company") manufactures, markets and distributes
cosmetics and proprietary over-the-counter pharmaceuticals. The Company's
principal cosmetics products are nail care products, nail color, color
cosmetics, beauty implements, bleaches and depilatories, personal care products,
and other related cosmetic items. The Company's cosmetics products are marketed
under such well-known brand names as Sally Hansen Hard as Nails and Sally Hansen
Professional Nail (nail care and nail color products), CornSilk (face make-up),
LaCross (beauty implements), N.Y.C. New York Color (color cosmetics), and
Naturistics (color cosmetics and bath and body care). The Company's proprietary
pharmaceutical products include oral analgesics, first-aid products, eye/ear
medications, diabetes treatments and baby care products. The Company's
pharmaceutical products are marketed under such well-known brand names as Orajel
and Tanac (oral analgesics), Pronto (pediculicides), Stye (ophthalmic ointment),
Dermarest (psoriasis), Auro-Dri (ear remedy), DiabetAid (diabetes symptom
relief) and Gentle Naturals (baby care products). The Company's products are
sold principally in the United States and Canada to wholesalers and independent
chain drug, mass merchandisers and food stores.
The Company seeks to increase sales by aggressively marketing its products under
established brand names. The Company targets the mass market, which accounts for
a major portion of the decorative color cosmetics market and the majority of the
over-the-counter pharmaceuticals market. The Company's customers in the mass
market channel include major drug store chains: Walgreens, Rite Aid, CVS and
Eckerd; major national mass merchandiser chains: Wal-Mart, K-Mart and Target,
and numerous regional chain drug stores and mass merchandisers. The Company also
distributes its pharmaceutical products to drug wholesalers, including McKesson
HBOC, Amerisource-Bergen Brunswig and Cardinal Health, Inc. and national food
chains, including Ahold, Safeway, Kroger and Albertson's. Other than Wal-Mart
Stores, Inc., which accounted for 25.4%, 23.1% and 23.9% of the Company's total
net sales for 2002, 2001 and 2000, respectively, and Walgreens which accounted
for 12.0%, 11.6% and 11.7% of the Company's total net sales in 2002, 2001 and
2000, respectively, no single customer accounted for more than 10% of the
Company's total net sales. Although the Company's loss of one or more customers
that may account for a significant portion of the Company's sales, or any
significant decrease in sales to any of these customers, could have a material
adverse effect on the Company's business, financial condition or results of
operations, the Company has no reason to believe that any such loss of customer
or decrease in sales will occur. In January 2002, K-Mart Corporation filed a
bankruptcy petition for reorganization under Chapter XI of the U.S. Bankruptcy
Code. The Company resumed shipments to K-Mart subsequent to their receipt of new
debtor-in-possession financing and continues to believe that they are a valuable
customer.
The Company advertises its products on television and radio and in magazines.
In-store displays and promotional activities are also utilized to attract
consumer attention and to inform them of the products available under the
Company's various brands. Cooperative advertising programs with retailers are
also employed to further enhance consumer awareness of the Company's products
and brands. Advertising expenditures were approximately $30.8 million or 8.8% of
net sales in 2002, $30.5 million or 10.0% of net sales in 2001 and $27.8 million
or 10.2% of net sales in 2000.
The Company utilizes two in-house national sales organizations, one for its
cosmetics product lines and one for its pharmaceutical product lines. The
Company also employs independent manufacturers' representatives in selected
geographic areas where a full-time sales employee would not be economically
justified.
Certain financial information regarding the Company's industry segments is set
forth in the table below.
INDUSTRY SEGMENTS (In thousands of dollars)
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2002 2001 2000
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Net sales to unaffiliated customers: (a)
Cosmetics $283,857 $239,183 $209,781
Pharmaceuticals 66,811 65,443 61,196
Operating income:
Cosmetics 23,543 12,002 5,306
Pharmaceuticals 9,751 11,405 11,211
Identifiable assets:
Cosmetics 139,465 126,058 133,090
Pharmaceuticals 29,131 25,549 24,737
Corporate (unallocated assets) 42,386 38,594 36,403
(a) On January 1, 2002, the Company adopted EITF Issue No. 01-9 (previously
Issue Nos. 00-14 and 00-25). As a result, certain sales incentives historically
included in selling and administrative expenses have been reclassified to net
sales. Prior year net sales have been reclassified to conform with current year
presentation.
2
The Company was incorporated in Delaware in 1961. The Company's cosmetics
business is conducted primarily by the Company and its wholly-owned subsidiary,
Del Laboratories (Canada) Inc., which sells the Company's cosmetics products to
the Canadian market. The Company's pharmaceuticals business is conducted
primarily by the Company's wholly-owned subsidiary, Del Pharmaceuticals, Inc.,
and its wholly-owned subsidiary, Del Pharmaceutics (Canada) Inc., which sells
the Company's pharmaceutical products to the Canadian market.
The Company's products are sold in over thirty foreign countries through a
limited number of subsidiaries and through contracts with local distributors and
licensees. Export net sales (which exclude sales in Canada and Puerto Rico) have
historically not exceeded 5% of the Company's total net sales in any year.
Export net sales represented approximately 2% of the Company's total net sales
in 2002, 2001 and 2000.
The Company sells standard packaged cosmetic and over-the-counter pharmaceutical
products. The Company's customers expect quick response on standard merchandise
orders. The Company does not have a material amount of order backlog. Consistent
with the packaged goods industry, the Company accepts authorized returns of
unmerchantable, defective or discontinued products.
The Company purchases raw materials used in its manufacturing processes from
various other manufacturers, paperboard suppliers and bottle distributors. The
Company has not experienced any difficulty obtaining raw materials and believes
that such materials are readily available.
The Company expended approximately $6,391,000, $5,414,000 and $5,292,000 in
2002, 2001 and 2000, respectively, on research activities relating to the
development of new products, clinical and regulatory affairs and quality
control, all of which activities are conducted internally by the Company.
Competition in both the cosmetics and over-the-counter pharmaceuticals markets
is intense. Many of the principal competitors in each of the Company's industry
segments are well-established firms with greater financial and marketing
resources. Frequent new product introductions and attendant advertising
characterize both industry segments in which the Company operates. Consumer
brand preferences in the Company's industry segments are generally influenced by
advertising, promotional support and price. The cosmetics industry is sensitive
to consumer purchasing power. The Company's competitors in the cosmetics market
include Revlon, Inc., Procter and Gamble (Cover Girl and Oil of Olay), L'Oreal
USA (Maybelline and L'Oreal) and, in the over-the-counter pharmaceuticals
market, Whitehall-Robbins Division of Wyeth Corp., Pfizer, Procter and Gamble
Co., Glaxo SmithKline, Bristol-Myers Squibb, Colgate Palmolive, Chattem, Inc.,
Bayer Corp. and Johnson and Johnson.
The Company has registered its principal trademarks in each segment of its
business both in the United States and in many countries throughout the world.
The Company considers its trademarks to be material assets, and the registration
and protection of its trademarks in the aggregate to be important to its
business, in that the success of certain of the products is due at least in part
to the goodwill associated with the Company's primary brand names. The Company
has also been issued several United States patents, expiring at various times
through 2020 and has licensed certain intellectual property from third parties.
While the Company believes its patents and licenses to be important, it does not
consider its business as a whole to be dependent on such licenses or patent
protection.
The Company currently has approximately 1,800 employees. Approximately 350 of
the Company's employees are represented by a labor union. The Company has not
experienced any work stoppages and considers its employee and labor relations to
be satisfactory.
The Company's 2002 Form 10-Q's and Form 10-K can be obtained from the Company's
website www.Dellabs.com.
3
ITEM 2 - PROPERTIES
The Company's corporate offices are located in 44,000 square feet of leased
space in Uniondale, New York.
The Company's principal manufacturing facility for both the cosmetics and
pharmaceutical segments is located at 565 Broad Hollow Road, Farmingdale, New
York. The building is a brick faced concrete block structure containing
approximately 120,000 square feet of floor space. The Company also occupies a
steel beamed and brick faced concrete block building, adjacent to the
Farmingdale facility described above, for administrative offices, which contains
approximately 20,000 square feet of floor space. Both buildings are owned by the
Company. On February 13, 2002, the Company sold 13.5 acres of vacant land in
Farmingdale, New York for gross proceeds of $3,335,000. The land was included in
property, plant and equipment at December 31, 2001, with a book value of
$500,000. 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 $5,000,000 and cannot be
exercised before December 1, 2004 or after December 1, 2005.
The Company owns certain property that was used for manufacturing facilities for
its cosmetics segment in Newark, New Jersey. The Newark buildings are brick
faced concrete block and contain approximately 90,000 square feet of floor
space. The Company closed down production at the facility in the first quarter
of 2002.
The Company owns property located in Canajoharie, New York, consisting of a
two-story brick and steel building with approximately 50,000 square feet of
floor space. This building is used by the cosmetics segment.
The Company owns property located in the City of Barrie, Province of Ontario,
Canada, consisting of a building with approximately 68,000 square feet of floor
space. The property is subject to a first mortgage. The facility is used for
manufacturing and shipping and contains the administrative offices of its
Canadian subsidiaries.
The Company owns property located in the City of Little Falls, New York,
consisting of a building with approximately 63,000 square feet of floor space.
The facility is used for production, warehousing and distribution. The Company
owns a second building located in close proximity to the Little Falls facility
described above. This 100,000 square foot facility is a one-story steel and
masonry industrial plant built in 1974 and is used for production and
warehousing.
The Company's principal distribution center is located in two Company-owned
buildings containing approximately 225,000 square feet, in Rocky Point, North
Carolina. On October 2, 2002, an agreement was signed with a general contractor
to expand the facility to approximately 430,000 square feet. The construction is
expected to be completed during the fourth quarter of 2003. Both buildings are
of insulated metal construction. The buildings and land are subject to a first
mortgage. The distribution center services both the cosmetics and pharmaceutical
segments.
The Company also has short-term leases for space in public warehouses used
primarily for the cosmetics segment.
The Company believes that its facilities are adequate to meet operating needs at
reasonable levels of production.
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various claims and legal actions arising in the
ordinary course of business, including environmental matters. The final
resolution of these matters on the Company's results of operations or liquidity
in a particular reporting period is not known. Management is of the opinion that
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter
of the fiscal year covered by this report.
4
PART II
ITEM 5 - MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange under the
symbol "DLI". The range of high and low sales prices as reported in the
consolidated transaction reporting system of such exchange, for each quarterly
period during the past two years as adjusted for the 5% stock dividends payable
on December 27, 2002, and December 28, 2001, is as follows:
2002 2001
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HIGH LOW HIGH LOW
First Quarter $ 18.46 $ 14.76 $ 10.32 $ 8.39
Second Quarter $ 24.75 $ 18.48 $ 11.02 $ 9.16
Third Quarter $ 24.10 $ 17.05 $ 15.65 $ 9.57
Fourth Quarter $ 24.48 $ 16.24 $ 15.83 $ 12.70
There were 446 holders of record of the Company's common stock at December 31,
2002. This does not include beneficial holders whose shares are held of record
by nominees. The Company paid 5% stock dividends in December 2002, 2001 and
2000. The Company has paid uninterrupted dividends for the past twenty-seven
years.
The terms of the Company's various borrowing agreements provide, among other
things, for certain restrictions on the payment of cash dividends, repurchase of
treasury stock and certain other expenditures.
Equity Compensation Plan Information
The following table sets forth certain information regarding the Company's
equity compensation plans as of December 31, 2002:
Number of securities remaining
Number of securities to be available for future issuance
issued upon exercise of Weighted-average exercise under equity compensation
outstanding options, price of outstanding options, plans (excluding securities
warrants and rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
Equity compensation plans
approved by security holders 2,402,649 $ 16.15 455,230
Equity compensation plans not
approved by security holders None Not applicable Not applicable
5
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The operating and balance sheet data below was derived from the consolidated
financial statements of the Company. The financial data should be read in
conjunction with the consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(Amounts in Thousands Except Per Share and Employee Data)
2002 2001 2000 1999 1998
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Operating data:
Net sales (a) $ 350,668 $ 304,626 $ 270,977 $ 241,456 $ 253,121
Net earnings (loss) 19,503 9,797 4,717 (4,002) 11,077
Earnings (loss) per common share: (b)
Basic 2.16 1.11 0.54 (0.46) 1.24
Diluted 2.07 1.09 0.53 (0.46) 1.15
Dividends per share:
Cash -- -- -- .105 .14
Stock 5% 5% 5% 2% --
Weighted-average common shares
outstanding: (b)
Basic 9,047 8,860 8,758 8,716 8,952
Diluted 9,432 9,002 8,849 8,716 9,595
Balance sheet data:
Total assets $ 210,982 $ 190,201 $ 194,230 $ 180,561 $ 177,474
Long-term debt 50,588 61,989 82,495 75,750 59,400
Working capital 81,236 72,279 85,666 74,472 62,728
Shareholders' equity 82,898 64,883 55,443 50,873 59,097
Other data:
Capital additions $ 9,078 $ 5,552 $ 7,850 $ 7,288 $ 7,224
Approximate # of employees 1,800 1,700 1,600 1,500 1,600
(a) On January 1, 2002, the Company adopted EITF Issue No. 01-9
(previously Issue Nos. 00-14 and 00-25). As a result, certain sales
incentives historically included in selling and administrative
expenses have been reclassified to net sales. Prior year net sales
have been reclassified to conform with current year presentation.
(b) Adjusted to reflect a 5% stock dividend effective November 29, 2002,
a 5% stock dividend effective December 1, 2001, a 5% stock dividend
effective November 30, 2000 and a 2% stock dividend effective
November 30, 1999.
6
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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. Note 1 of the notes to the consolidated financial statements includes
a summary of the significant accounting policies used in the preparation of the
accompanying consolidated financial statements. The following is a brief
discussion of the more critical accounting policies employed by the Company.
Revenue Recognition
The Company sells its products to chain drug stores, mass volume retailers,
supermarkets, wholesalers and overseas distributors. Sales of such products are
denominated in U.S. dollars and sales in Canada are denominated in Canadian
dollars. The Company's accounts receivable reflect the granting of credit to
these customers. The Company generally grants credit based upon analysis of the
customer's financial position and previously established buying and selling
patterns. The Company does not bill customers for shipping and handling costs
and, accordingly, classifies such costs as selling and administrative expense.
Revenues are recognized and discounts are recorded when merchandise is shipped.
Net sales are comprised of gross revenues less returns, various promotional
allowances and trade discounts and allowances. The Company allows customers to
return their unsold products when they meet certain criteria as outlined in the
Company's sales policies. The Company regularly reviews and revises, as deemed
necessary, its estimates of reserves for future sales returns based primarily
upon actual return rates by product and planned product discontinuances. The
Company records estimated reserves for future sales returns as a reduction of
sales, cost of sales and accounts receivable. Returned products which are
recorded as inventories are valued based on estimated realizable value. The
physical condition and marketability of the returned products are the major
factors considered by the Company in estimating realizable value. Actual
returns, as well as estimated realizable values of returned products, may differ
significantly, either favorably or unfavorably, from estimates if factors such
as economic conditions, customer inventory levels or competitive conditions
differ from expectations.
Effective January 1, 2002 the Company adopted Emerging Issues Task Force
("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer". EITF Issue No. 01-9 codified and reconciled the following EITF
issues: 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. 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 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 $35,320, $28,053 and $23,907 were recorded as a
reduction of net sales for the years ended December 31, 2002, 2001 and 2000,
respectively. In 2001 and 2000, 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 at
the later of the period in which the related revenue is recognized or when the
sales incentive is granted. 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 a reduction to
the cost of inventories based upon its forecasted plans to sell, historical
scrap and disposal rates and the physical condition of the inventories. These
reductions are estimates, which could vary significantly, either favorably or
unfavorably, from actual requirements if future economic conditions, the timing
of new product introductions, customer inventory levels, fashion-oriented color
cosmetic trends or competitive conditions differ from our expectations.
7
Property, Plant And Equipment And Other Long-lived Assets
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
estimated useful lives or the lease term. Changes in circumstances, such as
technological advances, changes to the Company's business model or changes in
the Company's capital strategy could result in the actual useful lives differing
from the Company's estimates. In those cases where the Company determines that
the useful life of property, plant and equipment should be shortened, the
Company would depreciate the net book value in excess of the salvage value, over
its revised remaining useful life, thereby increasing depreciation expense.
Factors such as changes in the planned use of equipment, fixtures, software or
planned closing of facilities could result in shortened useful lives.
Long-lived assets, other than goodwill, are reviewed by the Company for
impairment whenever events or changes in circumstances indicate that the
carrying amount of any such asset may not be recoverable. The estimate of cash
flow is based upon, among other things, certain assumptions about expected
future operating performance. The Company's estimates of undiscounted cash flow
may differ from actual cash flow due to, among other things, technological
changes, economic conditions, changes to its business model or changes in its
operating performance. If the sum of the undiscounted cash flows (excluding
interest) is less than the carrying value, the Company would recognize 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.
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.
8
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net sales were $350.7 million and $304.6 million for 2002 and 2001,
respectively, an increase of $46.1 million or 15.1%. Net sales for 2001 include
a reclassification to conform with current year presentation in accordance with
EITF Issue No. 01-9. On January 1, 2002, the Company adopted EITF Issue No. 01-9
(previously Issue Nos. 00-14 and 00-25). As a result, certain sales incentives
historically included in selling and administrative expenses have been
reclassified to net sales. Cosmetic net sales were $283.9 million and $239.2
million for 2002 and 2001, respectively, an increase of $44.7 million or 18.7%.
The increase is due primarily to volume growth in the Sally Hansen family of
brands. According to ACNielsen, the Sally Hansen brand remains the number one
brand in the mass market nail care category and finished the year with a 14%
increase in retail sales, while the brand continues as the leader in the mass
market nail color category with a 31% share of market. The N.Y.C. New York Color
brand of cosmetics achieved a 33% increase in retail sales according to
ACNielsen. Pharmaceutical net sales were $66.8 million and $65.4 million for
2002 and 2001, respectively, an increase of $1.4 million or 2.1%. The 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. Increased
Pharmaceutical sales in 2002 compared to 2001 were partially reduced by higher
promotional costs in 2002 compared to 2001 and the reclassification of these
promotional costs as a reduction from revenue in accordance with EITF Issue No.
01-9. While the Orajel brand sales only had a slight increase over prior year
due to a reduction of inventory levels by wholesalers and retailers, the brand
increased its leadership position in the oral analgesics category with a 27.7%
share of market for the year as reported by Information Resources, Inc.
Cost of sales were $171.3 million or 48.9% of net sales in 2002, compared to
$146.6 million or 48.1% in 2001, an increase of $24.7 million or 16.8%. The
increase is primarily due to higher manufacturing costs associated with the
higher sales volume in Cosmetics and a change in sales mix in Pharmaceuticals
primarily attributable to the new Gentle Naturals and DiabetAid brands. Selling
and administrative expenses were $146.0 million or 41.6% of net sales in 2002
compared to $134.6 million or 44.2% of net sales in 2001. The expenses include
charges of $0.4 million in 2002 and $3.1 million in 2001 for a provision for
doubtful accounts related to the K-Mart Chapter XI bankruptcy filing. Before
this charge, selling and administrative expenses in prior year were $131.5 or
43.2% of net sales. The increase in selling and administrative expenses in 2002
is primarily due to higher shipping costs related to increased sales,
increased selling costs, and increased compensation and pension expenses. The
improvement in selling and administrative expenses, as a percentage of net
sales, is attributable to net sales increasing at a higher rate than increases
in expenses.
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 thousand 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 thousand in selling and administrative expenses.
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 thousand 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 an additional $18 thousand 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. The charge of $785 thousand ($495
thousand after-tax) reduced basic earnings per share by $0.05 for the year 2002.
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 $3.3 million which
was reduced by $160 thousand for closing costs. In addition, $235 thousand of
the sales price was paid by the purchaser on February 12, 2003. The land was
included in property, plant and equipment at December 31, 2001, with a book
value of $500 thousand. After transaction related costs of $407 thousand, a gain
of $2.4 million was recorded in the first quarter of 2002. In connection with
this sale, an option was granted to the buyer for the remaining 8.5 acres of
improved land and buildings owned by the Company. The option is for a purchase
price of no less than $5.0 million and cannot be exercised before December 1,
2004 or after December 1, 2005. The gain of $2.4 million ($1.5 million
after-tax) increased basic earnings per share by $0.17 for the year 2002.
9
Interest expense, net of interest income, was $4.4 million in 2002 compared to
$6.8 million in 2001. The decrease in net interest expense in 2002 compared to
2001 is due primarily to a reduction in average outstanding borrowings of
approximately $14.0 million and to a reduction of approximately 200 basis points
in average borrowing rates.
The Company's effective annual tax rate for 2002 was 36.9% compared to 39.4% for
2001. The decrease in the effective tax rate is primarily due to the decrease in
the amount of permanent non-deductible expenses in comparison to the prior year
and the reduced effect of such non-deductible expenses on taxable income for
2002. The Company's tax expense was also reduced in 2002 by a change in the
valuation allowance of approximately $818 thousand resulting from the
utilization of foreign and other tax credits, as well as the recognition of
foreign tax credit carry forwards of $305 thousand, as it was determined that it
is more likely than not that such carry forwards will be utilized in the future.
As a result of the above net earnings increased to $19.5 million, or 5.6% of net
sales in 2002, compared to $9.8 million, or 3.2% of net sales in 2001. The
Company believes that general inflation has had no significant impact on its
earnings from operations during the last three years.
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net sales were $304.6 million and $271.0 million for 2001 and 2000,
respectively, an increase of $33.6 million or 12.4%. Cosmetics net sales were
$239.2 million and $209.8 million for 2001 and 2000, respectively, an increase
of $29.4 million or 14.0%. The increase is primarily due to volume growth in the
Sally Hansen family of brands and in N.Y.C. New York Color. Pharmaceutical net
sales were $65.4 million and $61.2 million for 2001 and 2000, respectively, an
increase of $4.2 million or 6.9%. The increase is primarily attributable to
volume growth of the Orajel brand of oral analgesics and the Dermarest brand of
psoriasis treatment.
Cost of sales were $146.6 million or 48.1% of net sales in 2001, compared to
$130.6 million or 48.2% in 2000, an increase of $16.0 million or 12.3%. The
increase is primarily due to higher manufacturing costs associated with the
increase in unit volume, and to a lesser extent an increase in merchandise
scrapped and accelerated depreciation related to the Newark, New Jersey plant
closure.
Selling and administrative expenses were $134.6 million or 44.2% of net sales in
2001 compared to $123.9 million or 45.7% of net sales in 2000. The increase in
expenses is primarily attributable to increased advertising, increases in
compensation and retirement costs, a charge for a potential environmental
liability as described below, and an increase of $3,100,000 in the provision for
doubtful accounts related to the K-Mart Chapter XI bankruptcy filing. The
improvement in selling and administrative expenses, as a percentage of net
sales, is primarily attributable to net sales increasing at a higher rate than
increases in spending.
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. The Company recorded an
estimate of $550,000 in selling and administrative expenses during the third
quarter of 2001 based on information received from the EPA as to its potential
liability for past remediation activities.
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 $226,000 were recorded in the second quarter of 2001. During the
second quarter of 2002, an additional $45,000 in exit plan expenses was
recorded. As of December 31, 2002, the plant was closed, a total of 67
production and clerical employees were terminated and all exit costs totaling
$271,000 were paid.
Net interest expense was $6.8 million in 2001 compared to $8.2 million in 2000.
The decrease is due to a significant reduction in the average outstanding
borrowings in 2001, in addition to decreased borrowing rates, as compared to
2000.
The Company's effective annual tax rate for 2001 was 39.4%, compared to 43.0%
for 2000. The decrease in the effective tax rate for 2001 is primarily due to
the reduced effect of non-deductible expenses on taxable income.
As a result of the above, net earnings increased to $9.8 million, or 3.2% of net
sales in 2001, compared to $4.7 million, or 1.7% of net sales in 2000. The
Company believes that general inflation has had no significant impact on its
earnings from operations during the last three years.
10
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2002, the Company had cash and cash equivalents of $0.5 million
as compared to $2.7 million in 2001.
Net cash provided by operating activities was $13.8 million due primarily to net
earnings of $19.5 million and an increase in accounts payable of $10.8 million.
These increases in net cash provided by operating activities were partially
offset by the higher inventories of $17.2 million. The increases in accounts
payable and inventories are due to the timing of purchases of raw materials and
components to support projected sales levels. Cash of $2.9 million, $0.01
million and $0.8 million was provided by the sales of land and facilities in
2002, 2001 and 2000, respectively. Cash used for property, plant and equipment
additions was $9.1 million, $5.6 million and $6.0 million for 2002, 2001 and
2000, respectively. Capital expenditures for 2002, 2001 and 2000 were primarily
for manufacturing machinery and equipment.
Net cash used in financing activities was $9.8 million and $20.8 million for
2002 and 2001, respectively. In 2002, 2001 and 2000, cash was used primarily for
principal payments under long-term debt of $7.4 million, $20.2 million and $8.1
million, respectively, the acquisition of shares of the Company's common stock
in connection with stock option exercises aggregating $2.6 million, $0.6 million
and $0.7 million, respectively, and also in 2000 for repayments of short-term
lines of credit of $17.3 million. At December 31, 2002, based on existing Board
authorization, up to 549,327 shares of the Company's common stock were available
for open market purchases. At December 31, 2002, the Company was free to effect
stock purchases and/or cash dividends of up to $4.0 million pursuant to the
covenants of the senior notes and revolving credit agreement. No such amounts
were available at December 31, 2001.
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 $8.0 million on May 31, 2003 and May 31, 2004 and $16.0 million on May 31,
2005. The amended agreement is unsecured and includes covenants, which provide
among other things for the maintenance of financial 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 $45.0 million and extends the expiration to March
26, 2005. As a result of this amendment, the Company's credit line increased to
$45.0 million from $43.5 million. 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 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 April 3, 2000, the Company sold a 39,000 square foot manufacturing,
warehousing and office facility in Barrie, Ontario, with a net book value of
approximately $442 thousand for net proceeds of approximately $804 thousand.
Approximately $627 thousand of the proceeds was used to satisfy a mortgage
bridge loan on its new facility in Barrie, Ontario purchased on February 22,
2000.
On April 26, 2000, the Company refinanced its purchase money promissory note of
$3.8 million for its property in North Carolina with a five-year $4.5 million
mortgage on the land and buildings. On March 21, 2003, the Company refinanced
this mortgage with a seven-year $12.5 million mortgage on the land and
buildings. The mortgage provides construction funding as funds are expended
during the facility expansion project. The mortgage includes an interest rate
based on LIBOR plus 1.75%, principal payments based on a 20 year amortization
schedule, a balloon payment due in March 2010, and terms that provide for the
maintenance of certain financial ratios.
11
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 $3.3 million which
was reduced by $160 thousand for closing costs. In addition, $235 thousand of
the sales price was paid by the purchaser on February 12, 2003. The land was
included in property, plant and equipment at December 31, 2001, with a book
value of $500 thousand. After transaction related costs of $407 thousand, the
sale resulted in a gain of $2.4 million (approximately $1.5 million after-tax,
or $0.17 per basic share). 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 $5.0 million and
cannot be exercised before December 1, 2004 or after December 1, 2005.
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 $7.7
million of which approximately $1.0 million was incurred through December 31,
2002, and be completed during the fourth quarter of 2003.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual obligations as of December 31, 2002, the
Company has included the following table:
PAYMENTS DUE BY PERIOD
($000)
LESS THAN 1 - 2 2 - 3 3 - 5
TOTAL 1 YEAR YEARS YEARS YEARS
------- ------- ------- ------- ------
Long-term debt $36,984 $ 8,396 $ 8,411 $20,177 $ -
Revolving credit agreement 22,000 - - 22,000 -
Operating leases 4,974 2,452 1,976 294 252
Construction commitment(a) 7,200 7,200 - - -
------- ------- ------- ------- ------
Total contractual obligations $71,158 $18,048 $10,387 $42,471 $ 252
======= ======= ======= ======= ======
(a) The timing of the payments are based on the current construction timetable.
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 during 2003. However, there can be no
assurance that the combination of cash flow from future operations, cash on hand
and amounts available from the credit facility 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 adopted SFAS No.
143 on January 1, 2003 and has determined that the adoption of SFAS
No. 143 will have no material effect 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.
12
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that at the inception of the
guarantee, a liability be recorded on the guarantor's balance sheet for the fair
value of the obligation undertaken in issuing the guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued. The Company
will apply the recognition provisions of FIN 45 prospectively to guarantees
issued after December 31, 2002. The Company does not expect the prospective
recognition provisions of FIN 45 to have a material effect on its consolidated
financial statements.
ITEM 7A - MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in the Company's market risk sensitive instruments is
the potential loss arising from material adverse changes in interest rates and
foreign currency exchange rates.
INTEREST RATE RISK
The Company's borrowings at December 31, 2002 under the revolving credit
agreement expose earnings to changes in short-term interest rates since interest
rates on the underlying obligations are either variable or fixed for such a
short period of time as to effectively become variable. The Company believes
that a hypothetical 10% increase or decrease in interest rates would increase or
decrease annual interest expense by approximately $92,000 for the year ended
December 31, 2002.
FOREIGN EXCHANGE RISK
The Company is subject to risk from changes in the foreign exchange rate for its
foreign subsidiaries which use a foreign currency as their functional currency
and is translated into U.S. dollars. Such changes result in cumulative
translation adjustments which are included in shareholders' equity and in the
determination of other comprehensive income (loss). Intercompany transactions
between the Company and its foreign subsidiaries are recorded by the foreign
subsidiaries in their functional currency. The potential translation loss
resulting from a hypothetical 10% adverse change in the quoted foreign currency
exchange rate amounts to approximately $799,000 at December 31, 2002.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and Financial
Condition and other sections of this Form 10-K 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.
13
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See consolidated financial statements and schedule included separately herein.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) The information required with respect to Directors is set forth under the
captions "Election of Directors - Information Concerning Directors" and
"Security Ownership of Certain Beneficial Owners - Section 16 (a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement for
the 2003 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A
and is incorporated herein by reference.
(b) The executive officers of the Company, the positions held by them, their
ages and the years in which they began to serve in the position or office held
as of December 31, 2002 are as follows:
(c) The Company has adopted a Code of Ethics that applies to the Company's Chief
Executive Officer, Chief Financial Officer, Controller, Treasurer, and Financial
Reporting Officer, or persons performing similar functions. A copy of the
Company's Code of Ethics is filed as Exhibit 14.1 hereto.
YEAR IN
WHICH BEGAN
TO SERVE IN
POSITION OR AS
NAME POSITION AGE EXECUTIVE OFFICER
Dan K. Wassong Chairman, President and
Chief Executive Officer, Director 72 1969
Charles J. Hinkaty Vice President, President of
Del Pharmaceuticals, Inc.,
Director 53 1985
Enzo J. Vialardi Executive Vice President,
Chief Financial Officer 66 1998
William H. McMenemy Executive Vice President of Marketing,
Cosmetics Division, North America 56 1980
Harvey P. Alstodt Executive Vice President of Sales,
Cosmetics Division, North America 63 1988
Timothy A. Hogan, Jr. Executive Vice President, Global Operations 62 2002
James F. Lawrence Group Vice President - Operations 68 1993
Gene L. Wexler Vice President, General Counsel
and Secretary 47 1999
Thomas Redder Vice President, Chief Information Officer 55 1996
There is no arrangement or understanding between any executive officer and any
other person pursuant to which he was selected as an officer. No family
relationship exists among any of the executive officers and directors of the
Company.
During the past five years, the principal occupation and employment of each of
the Company's executive officers has been his service in the respective position
shown in the above table, except as follows:
Enzo J. Vialardi has been Executive Vice President and Chief Financial Officer
of the Company since August 1998. Prior to that time, he served as an
independent consultant from January 1995 to August 1998.
Timothy A. Hogan, Jr. has been Executive Vice President, Global Operations of
the Company since February 2002. From 1998 to February 2002, he was President
and Chief Executive Officer of Dermablend, a Division of L'Oreal USA. From 1996
to 1998 he was Chief Executive Officer of S & H Global Marketing.
Gene L. Wexler has been Vice President, General Counsel and Secretary of the
Company since September 1999. From January 1994 through March 1999, he was Vice
President, General Counsel and Assistant Secretary at Genovese Drug Stores, Inc.
15
ITEM 11 - EXECUTIVE COMPENSATION
The information required is set forth under the caption "Executive Compensation"
in the Company's definitive Proxy Statement for the 2003 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A and is incorporated herein
by reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is set forth under the captions "Securities Ownership
of Certain Beneficial Owners" and "Election of Directors - Information
Concerning Directors" in the Company's definitive Proxy Statement for the 2003
Annual Meeting of Shareholders to be filed pursuant to Regulation 14A and is
incorporated herein by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required is set forth under the caption "Executive Compensation"
in the Company's definitive Proxy Statement for the 2003 Annual Meeting of
Shareholders to be filed pursuant to Regulation 14A and is incorporated herein
by reference.
ITEM 14 - CONTROLS AND PROCEDURES
As of a date within 90 days prior to the filing of this report (the "Evaluation
Date"), the Chief Executive Officer and Chief Financial Officer evaluated the
Company's disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14), and they have concluded that the Company's disclosure
controls and procedures are effective to bring to their attention material
information relating to the Company for the purposes of this report. In
addition, they have concluded that there have been no significant changes in the
Company's internal controls or in other factors that could significantly affect
those internal controls, including any corrective actions with regard to
significant differences and material weaknesses, subsequent to the Evaluation
Date.
PART IV
ITEM 15 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Documents filed as part of this report:
(1) and (2) See Consolidated Financial Statements and Schedule
included herein.
(3) Exhibit Index.
b) There were no reports on Form 8-K filed during the year ended December 31,
2002.
16
EXHIBIT INDEX
ITEM TITLE EXHIBIT NO. DESCRIPTION
Articles of 3.1 (a) Restated Certificate of Incorporation as filed
Incorporation with the Delaware Secretary of State on March 29,
and By-Laws 1996.
3.2 (b) Certificate of Amendment filed with the Delaware
Secretary of State on June 4, 1996.
3.3 (c) Certificate of Amendment of the Restated
Certificate of Incorporation filed with the
Delaware Secretary of State on June 3, 1998.
3.4 (a) By-Laws as amended through December 14, 1995.
Material 10.1 (d) Employee Pension Plan, effective January 1, 1997
Contracts (amended and restated).
10.2 Amendment No. 1 to Employee Pension Plan.
10.3 (d) Employee Stock Ownership Plan, effective January
1, 1997 (amended and restated).
10.4 Amendment No. 1 to Employee Stock Ownership Plan.
10.5 (d) 401(k) Plan effective January 1, 1997 (amended
and restated).
10.6 Amendment No. 1 to 401(k) Plan.
10.7 Amendment No. 2 to 401(k) Plan.
10.8 Amended and Restated Supplemental Executive
Retirement Plan.
10.9 1994 Stock Plan, as amended and restated on May
23, 2002.
10.10 (e) Annual Incentive Plan, as amended as of May 27,
1999.
10.11 (c) Amended and Restated Employment Agreement dated
as of July 1, 1999 between the Registrant and Dan
K. Wassong.
10.12 Amendment dated April 22, 2002 to Dan K. Wassong
Employment Agreement.
17
ITEM TITLE EXHIBIT NO. DESCRIPTION
10.13 Employment Agreement dated April 1, 2002 with
Charles J. Hinkaty.
10.14 (d) Employment Agreement with Harvey P. Alstodt,
dated April 1, 2001.
10.15 Amendment dated June 1, 2002 to Harvey P. Alstodt
Employment Agreement.
10.16 (d) Employment Agreement with William H. McMenemy,
dated April 1, 2001.
10.17 (d) Amendment to Employment Agreement with William H.
McMenemy, dated September 7, 2001.
10.18 (d) Employment Agreement With Enzo J. Vialardi, dated
April 1, 2001.
10.19 (d) Change in Control Agreement with Harvey P.
Alstodt, dated April 16, 2001.
10.20 (d) Change in Control Agreement with William H.
McMenemy, dated April 16, 2001.
10.21 Change in Control Agreement with Charles J.
Hinkaty, dated April 16, 2002.
10.22 (f) Life Insurance Agreement, dated as of February
18, 1993.
10.23 (g) Lease between Registrant and Coliseum Towers
Associates.
10.24 (d) Amended and Restated Loan Agreement dated as of
March 26, 2002 among the Registrant, as borrower,
Del Pharmaceuticals, Inc. ("DPI"), Parfums
Schiaperlli, Inc. ("Parfums"), Royce & Rader,
Inc. ("Royce") and 565 Broad Hollow Realty Corp.
("565"), as guarantors, and JP Morgan Chase, as
agent for the lenders.
10.25 (d) Amended and Restated Loan Agreement dated as
of March 26, 2002 among the Registrant, DPI,
Parfums, Royce, 565 and Jackson National Life
Insurance Company.
Code of Ethics 14.1 Code of Ethics.
18
ITEM TITLE EXHIBIT NO. DESCRIPTION
Subsidiaries of 21.1 List of Subsidiaries.
Registrant
Consents of 23.1 Consent of KPMG LLP dated March 25, 2003.
Experts and Counsel
Additional 99.1 Certification of Chief Executive Officer.
Exhibits 99.2 Certification of Chief Financial Officer.
(a) These exhibits were filed as exhibits to the Registrants Form 10-K for
the year ended December 31, 1995 as follows: Restated Certificate,
Exhibit 1; and By-Laws, Exhibit 2.
(b) This exhibit was filed as Exhibit 1 to the Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(c) These exhibits were filed as exhibits to the Registrant's Form 10-K
for the year ended December 31, 1999, as follows: 3.3 above was filed
as Exhibit 3.3 and 10.11 above was filed as Exhibit 10.14 to the 1999
10-K.
(d) These exhibits were filed as exhibits to the Registrant's Form 10-K
for the year ended December 31, 2001, as follows: Exhibits 10.3, 10.5,
10.14, 10.16, 10.17, 10.18, 10.19, 10.20, 10.24 and 10.25 above were
filed, respectively, as Exhibits 10.2, 10.3, 10.16, 10.17, 10.18,
10.19, 10.20, 10.21, 10.24 and 10.25 to the 2001 10-K.
(e) This exhibit was filed as Exhibit B to the Registrant's Definitive
Proxy Statement dated May 27, 1999, relating to the Registrant's 1999
Annual Meeting of Stockholders.
(f) This exhibit was filed as Exhibit 9 to the Registrant's Form 10-K for
the year ended December 31, 1993.
(g) This exhibit was filed as Exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1997.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ DAN K. WASSONG March 26, 2003
---------------
Dan K. Wassong, Chairman, President and Chief Executive Officer
Pursuant to the requirements of the Securities and Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant in
the capacities and on the dates indicated.
By /s/ DAN K. WASSONG March 26, 2003
---------------------------------------
Dan K. Wassong, Chairman, President and
Chief Executive Officer (Principal Executive Officer)
By /s/ CHARLES J. HINKATY March 26, 2003
--------------------------------------
Charles J. Hinkaty, Director, Vice President
By /s/ MARTIN E. REVSON March 26, 2003
--------------------------------------
Martin E. Revson, Director
By /s/ ROBERT A. KAVESH March 26, 2003
--------------------------------------
Robert A. Kavesh, Director
By /s/ STEVEN KOTLER March 26, 2003
--------------------------------------
Steven Kotler, Director
By /s/ MARCELLA MAXWELL March 26, 2003
--------------------------------------
Marcella Maxwell, Director
By /s/ ENZO J. VIALARDI March 26, 2003
--------------------------------------
Enzo J. Vialardi, Executive Vice President,
Chief Financial Officer
20
CERTIFICATIONS
I, Dan K. Wassong, certify that:
1. I have reviewed this annual report on Form 10-K of Del Laboratories, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: March 26, 2003
/s/ DAN K. WASSONG
---------------------------
Dan K. Wassong
Chief Executive Officer
21
CERTIFICATIONS
I, Enzo J. Vialardi, certify that:
1. I have reviewed this annual report on Form 10-K of Del Laboratories, Inc.;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and 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 annual 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 annual
report (the "Evaluation Date"); and
c) presented in this annual 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 officer 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 officer and I have indicated in this
annual 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: March 26, 2003
/s/ ENZO J. VIALARDI
-----------------------
Enzo J. Vialardi
Chief Financial Officer
22
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
and Schedule
Independent Auditors' Report F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 2002 and 2001. F-3
Consolidated Statements of Earnings for the years ended December 31, 2002,
2001 and 2000. F-4
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002,
2001 and 2000. F-6
Notes to Consolidated Financial Statements. F-7
Financial Statement Schedule:
II Valuation and Qualifying Accounts for the years ended December 31, 2002,
2001 and 2000. F-27
All other schedules are omitted as the required information is inapplicable or
the information is presented in the consolidated financial statements or related
notes.
F-1
Independent Auditors' Report
The Board of Directors and Shareholders
Del Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Del
Laboratories, Inc. and subsidiaries (the Company) as of December 31, 2002 and
2001, and the related consolidated statements of earnings, shareholders' equity
and cash flows for each of the years in the three-year period ended December 31,
2002. In connection with our audits of the consolidated financial statements, we
also have audited the financial statement schedule as listed in the accompanying
index. These consolidated financial statements and financial statement schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Del Laboratories,
Inc. and subsidiaries at December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also in our opinion, the related
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
/s/ KPMG LLP
------------
Melville, New York
February 26, 2003, except
as to note 6(b) which is as of
March 21, 2003
F-2
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and December 31, 2001
ASSETS 2002 2001
------
------------- -------------
Current assets:
Cash and cash equivalents $ 500,953 $ 2,687,551
Accounts receivable, less allowance for doubtful accounts
of $4,962,000 in 2002 and $4,200,000 in 2001 51,080,170 51,197,451
Inventories 79,912,957 62,677,679
Income taxes receivable 1,319,326 --
Deferred income taxes 7,933,362 6,300,012
Prepaid expenses and other current assets 2,980,976 2,302,007
------------- -------------
Total current assets 143,727,744 125,164,700
------------- -------------
Property, plant and equipment, at cost 62,477,682 58,866,493
Less accumulated depreciation and amortization (25,043,601) (23,628,691)
------------- -------------
Net property, plant and equipment 37,434,081 35,237,802
Intangibles arising from acquisitions, net 8,379,610 9,057,487
Goodwill 6,281,777 6,281,777
Other assets 10,139,139 9,209,348
Deferred income taxes 5,019,337 5,249,939
------------- -------------
Total assets $ 210,981,688 $ 190,201,053
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Current portion of long-term debt $ 8,395,929 $ 4,339,004
Accounts payable 32,396,863 21,100,597
Accrued liabilities 21,699,293 23,308,887
Income taxes payable -- 4,137,359
------------- -------------
Total current liabilities 62,492,085 52,885,847
Long-term pension liability, less current portion 10,656,343 6,563,173
Deferred income taxes 4,347,509 3,879,951
Long-term debt, less current portion 50,587,548 61,989,235
------------- -------------
Total liabilities 128,083,485 125,318,206
------------- -------------
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 10,000,000 10,000,000
Additional paid-in capital 5,393,282 835,145
Accumulated other comprehensive loss (4,278,351) (2,250,325)
Retained earnings 86,232,280 76,991,439
------------- -------------
97,347,211 85,576,259
Less: Treasury stock at cost, 872,261 shares
in 2002 and 1,505,256 shares in 2001 (13,666,758) (19,758,162)
Receivables for stock options exercised (782,250) (935,250)
------------- -------------
Total shareholders' equity 82,898,203 64,882,847
------------- -------------
Total liabilities and shareholders' equity $ 210,981,688 $ 190,201,053
============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
F-3
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Net sales $ 350,667,475 $ 304,626,160 $ 270,976,609
Cost of goods sold 171,345,644 146,648,074 130,603,845
Selling and administrative expenses 146,028,011 134,571,146 123,855,687
------------- ------------- -------------
Operating income 33,293,820 23,406,940 16,517,077
Other income (expense):
Gains on sales of facility and land 2,428,425 -- 361,526
Interest expense, net (4,402,315) (6,779,171) (8,192,968)
Other expense, net (404,949) (466,200) (410,690)
------------- ------------- -------------
Earnings before income taxes 30,914,981 16,161,569 8,274,945
Income taxes 11,412,034 6,364,587 3,558,000
------------- ------------- -------------
Net earnings $ 19,502,947 $ 9,796,982 $ 4,716,945
============= ============= =============
Earnings per common share:
Basic $ 2.16 $ 1.11 $ 0.54
============= ============= =============
Diluted $ 2.07 $ 1.09 $ 0.53
============= ============= =============
Weighted average common shares outstanding:
Basic 9,047,339 8,860,470 8,757,503
============= ============= =============
Diluted 9,431,758 9,001,984 8,849,258
============= ============= =============
The accompanying notes are an integral part of the
consolidated financial statements.
F-4
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
Accumulated
Additional Other
Common Paid-In Comprehensive Retained Treasury
Stock Capital Income (Loss) Earnings Stock
------------ -------------- -------------- ------------ ------------
Balances at December 31, 1999 $ 10,000,000 $ 126,899 $ (1,029,106) $ 75,136,416 $(32,119,800)
Transactions arising from stock option exercises:
Income tax benefit -- 625,156 -- -- --
Issuance of treasury stock (262,152 shares) -- (752,055) -- (828,184) 2,961,763
Acquisition of treasury stock (203,544 shares) -- -- -- -- (2,077,630)
Repayment of receivables -- -- -- -- --
Stock dividend -- -- -- (4,938,913) 4,938,913
Net earnings -- -- -- 4,716,945 --
Foreign currency translation adjustment -- -- (225,369) -- --
Minimum pension liability adjustment, net of tax -- -- (4,096) -- --
Total comprehensive loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2000 10,000,000 -- (1,258,571) 74,086,264 (26,296,754)
Transactions arising from stock option exercises:
Income tax benefit -- 602,046 -- -- --
Issuance of treasury stock (255,792 shares) -- (602,046) -- (766,929) 3,043,271
Acquisition of treasury stock (173,175 shares) -- -- -- -- (2,294,412)
Issuance of treasury stock for ESOP
stock contributions (44,255 shares) -- 35,186 -- (57,228) 522,042
Repayment of receivables -- -- -- -- --
Stock dividend -- 799,959 -- (6,067,650) 5,267,691
Net earnings -- -- -- 9,796,982 --
Foreign currency translation adjustment -- -- (516,639) -- --
Minimum pension liability adjustment, net of tax -- -- (475,115) -- --
Total comprehensive income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2001 10,000,000 835,145 (2,250,325) 76,991,439 (19,758,162)
Transactions arising from stock option exercises:
Income tax benefit -- 2,575,483 -- -- --
Issuance of treasury stock (608,206 shares) -- (1,514,005) -- -- 8,129,489
Acquisition of treasury stock (418,378 shares) -- -- -- -- (9,103,532)
Issuance of treasury stock for ESOP
stock contributions (17,898 shares) -- 34,764 -- -- 265,236
Repayment of receivables -- -- -- -- --
Stock dividend -- 3,461,895 -- (10,262,106) 6,800,211
Net earnings -- -- -- 19,502,947 --
Foreign currency translation adjustment -- -- 103,303 -- --
Minimum pension liability adjustment, net of tax -- -- (2,131,329) -- --
Total comprehensive income -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at December 31, 2002 $ 10,000,000 $ 5,393,282 $ (4,278,351) $ 86,232,280 $(13,666,758)
============ ============ ============ ============ ============
Receivables For
Stock Options Shareholders'
Exercised Equity
-------------- ------------
Balances at December 31, 1999 $ (1,241,250) $ 50,873,159
Transactions arising from stock option exercises:
Income tax benefit -- 625,156
Issuance of treasury stock (262,152 shares) -- 1,381,524
Acquisition of treasury stock (203,544 shares) -- (2,077,630)
Repayment of receivables 153,000 153,000
Stock dividend -- --
Net earnings -- --
Foreign currency translation adjustment -- --
Minimum pension liability adjustment, net of tax -- --
Total comprehensive loss -- 4,487,480
------------ ------------
Balances at December 31, 2000 (1,088,250) 55,442,689
Transactions arising from stock option exercises:
Income tax benefit -- 602,046
Issuance of treasury stock (255,792 shares) -- 1,674,296
Acquisition of treasury stock (173,175 shares) -- (2,294,412)
Issuance of treasury stock for ESOP
stock contributions (44,255 shares) -- 500,000
Repayment of receivables 153,000 153,000
Stock dividend -- --
Net earnings -- --
Foreign currency translation adjustment -- --
Minimum pension liability adjustment, net of tax -- --
Total comprehensive income -- 8,805,228
------------ ------------
Balances at December 31, 2001 (935,250) 64,882,847
Transactions arising from stock option exercises:
Income tax benefit -- 2,575,483
Issuance of treasury stock (608,206 shares) -- 6,615,484
Acquisition of treasury stock (418,378 shares) -- (9,103,532)
Issuance of treasury stock for ESOP
stock contributions (17,898 shares) -- 300,000
Repayment of receivables 153,000 153,000
Stock dividend -- --
Net earnings -- --
Foreign currency translation adjustment -- --
Minimum pension liability adjustment, net of tax -- --
Total comprehensive income -- 17,474,921
------------ ------------
Balances at December 31, 2002 $ (782,250) $ 82,898,203
============ ============
The accompanying notes are an integral part of the consolidated
financial statements.
F-5
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities:
Net earnings $ 19,502,947 $ 9,796,982 $ 4,716,945
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,577,216 8,504,377 7,768,103
Deferred income taxes 336,734 (3,581,074) 508,408
Provision for doubtful accounts 1,041,604 4,057,092 79,706
Gains on sales of land and facility (2,428,425) -- (361,526)
Other non-cash operating items 128,134 (572,546) 223,855
Changes in operating assets and liabilities:
Accounts receivable (882,270) 4,767,771 (14,423,225)
Inventories (17,157,054) (4,439,908) 376,724
Prepaid expenses and other current assets (678,458) 1,022,026 (870,951)
Other assets and pension liability (235,446) (3,674,972) (143,518)
Accounts payable 10,791,467 535,175 (6,436,276)
Accrued liabilities (1,324,936) 5,463,722 5,592,379
Income taxes receivable / payable (2,873,083) 4,272,049 3,033,706
------------ ------------ ------------
Net cash provided by operating activities 13,798,430 26,150,694 64,330
------------ ------------ ------------
Cash flows provided by (used in) investing activities:
Net proceeds from sales of land and facility 2,940,291 12,882 799,548
Property, plant and equipment additions (9,078,213) (5,551,577) (6,022,190)
------------ ------------ ------------
Net cash used in investing activities (6,137,922) (5,538,695) (5,222,642)
------------ ------------ ------------
Cash flows provided by (used in) financing activities:
Borrowings under long-term debt -- -- 29,023,200
Principal payments under revolving credit agreement, net (3,000,000) (16,000,000) (8,113,873)
Principal payments under other long-term debt (4,357,631) (4,218,022) --
Borrowings under short-term lines of credit -- -- 1,500,000
Repayments of short-term lines of credit -- -- (17,250,000)
Repayments on receivables for stock options exercised 13,000 13,000 13,000
Proceeds from the exercise of stock options 129,421 -- --
Acquisition of treasury stock (2,617,471) (620,114) (696,106)
------------ ------------ ------------
Net cash provided by (used in) financing activities (9,832,681) (20,825,136) 4,476,221
------------ ------------ ------------
Effect of exchange rate changes on cash (14,425) (9,439) 6,924
------------ ------------ ------------
Net decrease in cash and cash equivalents (2,186,598) (222,576) (675,167)
Cash and cash equivalents at beginning of year 2,687,551 2,910,127 3,585,294
------------ ------------ ------------
Cash and cash equivalents at end of year $ 500,953 $ 2,687,551 $ 2,910,127
============ ============ ============
The accompanying notes are an integral part of the
consolidated financial statements.
F-6
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
Del Laboratories, Inc. and subsidiaries (the Company) is a manufacturer and
distributor of cosmetics and proprietary pharmaceuticals. The principal products
in the cosmetics segment are nail care, nail color, color cosmetics, beauty
implements, bleaches and depilatories, personal care products and other related
cosmetic items. The principal products in the pharmaceutical segment are of a
proprietary nature and range from oral analgesics to acne treatment products and
first aid products.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of all
wholly-owned domestic and foreign subsidiaries. The net assets and results of
foreign operations are not significant to the consolidated financial statements.
The accounts of foreign subsidiaries are translated in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 52,
"Foreign Currency Translation." As such, balance sheet accounts are translated
at the exchange rate as of December 31 of each year and statement of earnings
accounts are translated at average exchange rates during the period. The
resulting translation adjustments are recorded as a component of shareholders'
equity. Gains or losses resulting from foreign currency transactions are
included in other income (expense). All intercompany accounts and transactions
have been eliminated in consolidation.
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.
Effective January 1, 2002, the Company adopted Emerging Issues Task Force
("EITF") Issue No. 01-9, "Accounting for Consideration Given by a Vendor to a
Customer". EITF Issue No. 01-9 codified and reconciled the following EITF
issues: 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 be recorded as a reduction from revenue, as opposed to a
selling expense. As a result of the implementation of EITF Issue No. 01-9, costs
of $35,320,217, $28,052,879 and $23,906,670 were recorded as a reduction of net
sales for the years ended December 31, 2002, 2001 and 2000, respectively. In
2001 and 2000, these costs were included in selling and administrative expenses
and have been reclassified to conform with current year presentation.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include deposits in banks, short-term commercial
paper, United States Treasury bills and money market funds with an initial term
of less than three months. Cash equivalents were $43,000 and $1,087,000 as of
December 31, 2002 and 2001, respectively. For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
F-7
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
INVENTORIES
Inventories are valued at the lower of cost (principally first-in/first-out) or
market value. The Company records reductions to the cost of inventories based
upon its forecasted plans to sell, historical scrap and disposal rates and
physical condition of the inventories. The components of inventories are as
follows:
2002 2001
----------- -----------
Raw materials $35,941,512 $29,114,398
Work in process 3,878,087 3,892,868
Finished goods 40,093,358 29,670,413
---------- ----------
$79,912,957 $62,677,679
=========== ===========
PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation on the straight-line method over the
estimated useful lives of the assets. Leasehold improvements are amortized on a
straight-line basis over the lesser of the estimated useful lives or the lease
term. The range of estimated lives applicable to the assets are as follows:
Building, building improvements and
leasehold improvements 10 to 50 years
Machinery and equipment 3 to 15 years
Furniture and fixtures 3 to 10 years
ADVERTISING COSTS AND PROMOTIONAL ALLOWANCES
The Company advertises on television and radio and in magazines. Additionally,
the Company has various co-operative advertising programs with retailers.
Advertising costs are expensed in the year incurred. Advertising expenses,
including co-operative advertising programs, were approximately $30,756,000,
$30,456,000 and $27,755,000 in 2002, 2001 and 2000, respectively. The Company
also 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 at the later
of the period in which the related revenue is recognized or when the sales
incentive is granted. 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.
RESEARCH AND DEVELOPMENT
The Company expended approximately $6,391,000, $5,414,000 and $5,292,000 in
2002, 2001 and 2000, respectively, for research and development relating to the
development of new products, clinical and regulatory affairs, and quality
control & assurance of the Company's product lines. All costs associated with
research and development are expensed as incurred and included in selling and
administrative expenses in the accompanying consolidated statements of
earnings.
INCOME TAXES
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
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.
F-8
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK DIVIDENDS
On November 7, 2002, the Company's Board of Directors approved a 5% stock
dividend. As a result, 434,835 shares of treasury stock were issued on December
27, 2002 to shareholders of record on November 29, 2002. Accordingly, all share
and per share amounts have been adjusted to reflect the 5% stock dividend
distributed December 27, 2002.
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. On November 15, 2000,
the Company's Board of Directors approved a 5% stock dividend. As a result,
399,253 shares of treasury stock were issued on December 27, 2000 to
shareholders of record on November 30, 2000.
STOCK OPTION PLANS
The Company applies the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25), and related interpretations, in accounting for its
fixed plan stock options. Under APB No. 25, compensation expenses would be
recorded if, on the date of grant, the market price of the underlying stock
exceeded its exercise price. Accordingly, no compensation cost has been
recognized. Had compensation cost for the stock option plans been determined
based on the fair value at the grant dates for awards under the plans,
consistent with the alternative method set forth under SFAS No. 123, "Accounting
for Stock-Based Compensation", and SFAS No. 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure", the Company's net earnings and net
earnings per share would have been reduced. The following table illustrates the
effect on net earnings and net earnings per share if the Company had applied the
fair value recognition provisions of SFAS No. 123, to stock based employee
compensation.
Year ended December 31 2002 2001 2000
- ---------------------- ---- ---- ----
Net earnings, as reported $19,502,947 $ 9,796,982 $4,716,945
Deduct: Total stock-based
employee compensation
expense determined under
fair value based method
for all awards, net of
related tax effects $(1,870,075) $(1,073,289) $ (956,747)
----------- ----------- ----------
Pro forma net earnings $17,632,872 $ 8,723,693 $3,760,198
=========== =========== ==========
Earnings per share:
Basic -- as reported $ 2.16 $ 1.11 $ 0.54
=========== =========== ==========
Basic -- pro forma $ 1.95 $ 0.98 $ 0.43
=========== =========== ==========
Diluted -- as reported $ 2.07 $ 1.09 $ 0.53
=========== =========== ==========
Diluted -- pro forma $ 1.87 $ 0.97 $ 0.42
=========== =========== ==========
The fair value of each option grant was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions for 2002, 2001 and 2000, respectively: dividend yields 0%, 0%, and
0%; expected lives of 5.9, 6.2, and 6.1 years; risk-free interest rates of
4.39%, 4.92%, and 4.72%; and expected volatility of 39.1%, 48.8%, and 45.5%. The
weighted-average fair value of options granted during 2002, 2001 and 2000 were
$9.90, $6.59, and $5.91, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets, other than goodwill, in accordance
with the provisions of SFAS No. 144, "Accounting for the Impairment of
Long-Lived Assets" which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. This statement supersedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of", while retaining the fundamental recognition and
measurement provisions of that statement. SFAS No. 144 requires that a
long-lived asset to be abandoned, exchanged for a similar productive asset or
distributed to owners in a spinoff to be considered held and used until it is
disposed of. However, SFAS No. 144 requires that management consider revising
the depreciable life of such long-lived asset. With respect to long-lived assets
to be disposed of by sale, SFAS No. 144 requires that discontinued operations no
longer be measured on a net realizable value basis and that future operating
losses associated with such discontinued operations no longer be recognized
before they occur. The Company adopted the provisions of SFAS No. 144 effective
January 1, 2002. The adoption of this statement did not have a material effect
on the Company's consolidated financial statements.
F-9
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which requires that the amortization of goodwill be replaced with
periodic tests of the goodwill's 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.
Additionally under SFAS No. 142, intangible assets with determinable lives,
other than goodwill, must be amortized over their useful lives. SFAS No. 142 was
effective for fiscal years beginning after December 15, 2001 and was adopted by
the Company on January 1, 2002. During the first quarter of 2002, the Company
performed the required SFAS No. 142 impairment tests of goodwill and determined
that no adjustment to the asset values or to the useful lives of the intangible
assets was 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 no adjustments
to earnings for the years ended December 31, 2002, 2001 and 2000.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reported period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications were made to prior year amounts in order to conform to
current year presentation.
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 adopted SFAS No.
143 on January 1, 2003 and has determined that the adoption of SFAS No.
143 will have no material effect 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.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 requires that at the inception of the
guarantee, a liability be recorded on the guarantor's balance sheet for the fair
value of the obligation undertaken in issuing the guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued. The Company
will apply the recognition provisions of FIN 45 prospectively to guarantees
issued after December 31, 2002. The Company does not expect the prospective
recognition provisions of FIN 45 to have a material effect on its consolidated
financial statements.
(2) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
2002 2001 2000
----------- ----------- -----------
Cash transactions:
Interest $ 4,466,594 $ 7,741,517 $ 7,919,286
=========== =========== ===========
Income taxes $14,068,067 $ 5,703,546 $ 2,008,009
=========== =========== ===========
Non-cash transactions:
Income tax benefit arising from
stock options exercised $ 2,575,483 $ 602,046 $ 625,156
=========== ========= =========
Shares tendered by optionees to
exercise stock options $ 6,486,015 $ 1,674,296 $ 1,381,524
=========== =========== ===========
Financed purchase
of Canadian facility $ - $ - $ 1,828,000
=========== =========== ===========
F-10
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment, at cost, are as follows:
2002 2001
------------ ------------
Land $ 1,809,171 $ 2,302,824
Building, building improvements
and leasehold improvements 19,952,181 19,283,389
Machinery and equipment 31,732,963 30,586,570
Furniture and fixtures 6,414,762 6,188,765
Construction in progress 2,568,605 504,945
------------ ------------
$ 62,477,682 $ 58,866,493
============ ============
Depreciation expense for 2002, 2001 and 2000 was $6,899,339, $7,623,533 and
$6,887,237, respectively.
(4) GOODWILL AND OTHER INTANGIBLES ARISING FROM ACQUISITIONS
Goodwill represents the excess of the purchase prices paid for companies and
product lines over amounts assigned to the fair value of the net tangible assets
as well as purchased intellectual property rights and trademarks. Total goodwill
related to acquisitions prior to 1971 amount to $6,660,000, of which $378,000
was written off in 1995 due to a diminution in value. Of this balance,
$3,520,000 relates to the cosmetics operating segment and $2,762,000 relates to
the pharmaceutical operating segment. The remaining $6,282,000 is not impaired
under the provisions of SFAS No. 142.
The components of intangible assets arising from acquisitions are as follows:
DECEMBER 31, 2002
GROSS CARRYING ACCUMULATED NET BOOK
VALUE AMORTIZATION VALUE
Intellectual property rights $10,557,573 $ 2,478,163 $ 8,079,410
Trademarks 3,000,200 2,700,000 300,200
----------- ----------- -----------
$13,557,773 $ 5,178,163 $ 8,379,610
=========== =========== ===========
DECEMBER 31, 2001
GROSS CARRYING ACCUMULATED NET BOOK
VALUE AMORTIZATION VALUE
Intellectual property rights $10,557,573 $ 1,950,286 $ 8,607,287
Trademarks 3,000,200 2,550,000 450,200
----------- ----------- -----------
$13,557,773 $ 4,500,286 $ 9,057,487
=========== =========== ===========
In 1998, the Company acquired the intellectual property rights of the CornSilk
brand of facial make-up for $11,039,474. In September 1999, the Company entered
into an agreement with the former owner of CornSilk related to this acquisition.
Under the provisions of this agreement, adjustments to the original purchase
price were negotiated. As a result, the intangible assets arising from the
acquisition were reduced by approximately $481,901. The intellectual property
rights are being amortized over 20 years. Upon adoption of SFAS No. 142, the
remaining useful lives were still deemed appropriate.
The remaining trademarks at December 31, 2002 are the Quencher trademarks
acquired in 1984 and are being amortized over 20 years.
Amortization expense amounted to $677,877, $880,844 and $880,866 for 2002, 2001
and 2000, respectively. The estimated amortization expense for the years ending
December 31, 2003, 2004, 2005, 2006 and 2007 is $677,880, $677,880, $527,879,
$527,879 and $527,879, respectively.
F-11
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(5) INCOME TAXES
The components of income tax expense are as follows:
2002 FEDERAL STATE FOREIGN TOTAL
- ---- ------- ----- ------- -----
Current tax $ 8,850,967 $ 855,284 $ 1,369,049 $ 11,075,300
Deferred tax 223,943 112,791 -- 336,734
------------ ------------ ------------ ------------
$ 9,074,910 $ 968,075 $ 1,369,049 $ 11,412,034
============ ============ ============ ============
2001
- ----
Current tax $ 8,016,707 $ 492,938 $ 1,436,016 $ 9,945,661
Deferred tax (3,039,908) (541,166) -- (3,581,074)
------------ ------------ ------------ ------------
$ 4,976,799 $ (48,228) $ 1,436,016 $ 6,364,587
============ ============ ============ ============
2000
- ----
Current tax $ 1,854,542 $ 280,883 $ 914,575 $ 3,050,000
Deferred tax 562,004 (54,004) -- 508,000
------------ ------------ ------------ ------------
$ 2,416,546 $ 226,879 $ 914,575 $ 3,558,000
============ ============ ============ ============
Total income tax expense differed from the statutory rates of 35% for 2002 and
2001 and 34% for 2000 of earnings before income taxes, as a result of the
following items:
2002 2001 2000
---- ---- ----
Tax provision at statutory rate (35% in 2002, $ 10,820,244 $ 5,656,549 $ 2,813,481
35% in 2001 and 34% in 2000)
Increase (decrease) in tax resulting from:
State income taxes, net of Federal
income tax benefit 629,249 (31,348) 149,740
Amortization of intangibles 52,500 123,540 120,012
Officers' life insurance 79,740 102,185 99,266
Meals and entertainment 136,621 107,036 96,722
Extraterritorial income exclusion (91,000) (87,500) --
Change in the beginning of the year
valuation allowance (818,047) (349,286) 58,584
Foreign rate differential and benefit of
foreign tax credit 188,372 379,679 252,720
Other, net 414,355 463,732 (32,525)
------------ ------------ ------------
Actual provision for income taxes $ 11,412,034 $ 6,364,587 $ 3,558,000
============ ============ ============
F-12
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For presentation
purposes, certain of such tax assets and liabilities are shown net on the
accompanying consolidated balance sheets. Significant components of the
Company's deferred tax assets and liabilities as of December 31, are as follows:
2002 2001
----------- -----------
Deferred tax assets:
Accounts receivable, principally
due to allowance for doubtful accounts $ 1,134,878 $ 1,802,360
Supplemental Executive Retirement Plan
(SERP), principally due to
accrual for financial statement purposes 2,349,714 2,075,704
Inventory, principally due to reserve 4,661,187 4,085,317
Pension accrual for financial reporting purposes
and other compensation benefits 4,083,607 2,969,900
Tax credit carry forwards 305,020 818,047
Other 418,293 616,670
----------- -----------
12,952,699 12,367,998
Valuation allowance - (818,047)
----------- -----------
Deferred tax assets 12,952,699 11,549,951
----------- -----------
Deferred tax liabilities
Property, plant and equipment,
principally due to differences
in depreciation methods (4,347,509) (3,879,951)
----------- -----------
Deferred tax liabilities (4,347,509) (3,879,951)
----------- ------------
Net deferred tax assets $ 8,605,190 $ 7,670,000
=========== ===========
At December 31, 2002, a deferred tax asset of $1,619,000 was recorded on the
consolidated balance sheet relating to the additional minimum pension liability
(note 7(a)). Such liability, net of the related deferred tax asset, was recorded
directly as a component of accumulated other comprehensive loss, in accordance
with SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 130,
"Reporting Comprehensive Income."
A valuation allowance is recorded when management determines that it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies, among
other factors, in making this assessment. The net change in the valuation
allowance in 2002 was a decrease of $818,047. Based upon the level of historical
taxable income and projections for future taxable income over the periods which
the temporary differences are deductible, management believes it is more likely
than not that the Company will realize the benefits of net deferred tax assets
as of December 31, 2002.
F-13
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) LONG-TERM DEBT
2002 2001
---- ----
9.5% senior notes $32,000,000 $36,000,000
Notes payable under revolving credit agreement 22,000,000 25,000,000
Mortgages on land and building 4,983,477 5,328,239
----------- -----------
$58,983,477 $66,328,239
Less current portion 8,395,929 4,339,004
----------- -----------
$50,587,548 $61,989,235
=========== ===========
(a) 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 $8,000,000 on May 31, 2003 and May 31, 2004 and $16,000,000 on May 31, 2005.
The amended agreement is unsecured and includes covenants, which provide among
other things for the maintenance of financial 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 $45,000,000 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 2002 and 2001 were 4.1% and 8.8%, respectively. The terms of the
agreement include a commitment fee based on unutilized amounts and an annual
agency fee. The deferred financing fees associated with the March 26, 2002
amendment and the unamortized deferred financing fees related to the February
25, 2000 agreement are being amortized over the term of the new agreement.
Covenants provide among other things, for the maintenance of financial 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 previous amended
February 25, 2000 revolving credit agreement.
On February 22, 2000, the Company purchased a manufacturing, warehousing and
office facility in Barrie, Ontario for $1,828,000. The purchase was financed
with a combination of a mortgage bridge loan and a five-year mortgage.
On April 26, 2000, the Company refinanced its purchase money promissory note of
$3.8 million for its property in North Carolina with a five-year $4.5 million
mortgage on the land and buildings.
The aggregate maturities of long-term debt for each of the five years subsequent
to December 31, 2002, are as follows:
2003 $ 8,395,929
2004 8,411,193
2005 42,176,355
2006 -
2007 -
-----------
$58,983,477
===========
(b) On March 21, 2003, the Company refinanced the mortgage on its property in
North Carolina with a seven-year $12.5 million mortgage on the land and
buildings. The mortgage provides construction funding as funds are expended
during the facility expansion project. The mortgage includes an interest rate
based on LIBOR plus 1.75%, principal payments based on a 20 year amortization
schedule, a balloon payment due in March 2010, and terms that provide for the
maintenance of certain financial ratios.
F-14
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) EMPLOYEE RETIREMENT PLANS
(a) PENSION PLANS
The Company maintains two non-contributory defined benefit pension plans
covering all U.S. eligible employees. The Del Non-Union Plan formula is based on
years of service and the employee's compensation during the five years before
retirement. The Del LaCross Union Plan formula is based on years of service. The
LaCross Plan covers employees of the Company's Newark, New Jersey facility which
ceased operations during 2002. As a result of this closure, more than 20% of
plan participants in the LaCross Plan were terminated, which resulted in a
partial termination of the plan. Due to the partial termination of the plan, all
affected participants became fully vested in their accrued benefits at their
termination date. The Company made contributions to these plans of $5,218,000,
$2,042,000 and $243,000 in 2002, 2001 and 2000, respectively. Assets held by
these plans consist of cash and cash equivalents, fixed income securities
consisting of U.S. government and corporate bonds and common stocks. The Company
also has a defined benefit supplemental executive retirement plan (SERP) for
certain of its executives. The SERP is a non-qualified plan under the Internal
Revenue Code. The assets in the SERP trust, which were approximately $4,134,000
and $4,067,000 as of December 31, 2002 and 2001, respectively, are considered
assets of the Company, not plan assets, and as such, are included in other
assets on the accompanying consolidated balance sheets. The assets of the SERP,
which consist of cash and cash equivalents and U.S. government bonds, are
held-to-maturity securities and, as such, are carried at cost plus accrued
interest. The Company made no contribution during 2002 to the SERP trust. A
contribution of $1,450,000 was made in 2001 and no contribution was made in 2000
to the SERP trust.
Total pension expense for 2002, 2001 and 2000 amounted to approximately
$3,474,000, $2,488,000 and $1,548,000, respectively. The change in benefit
obligation, change in plan assets and funded status as of December 31, 2002 and
2001 and components of net periodic cost for 2002, 2001 and 2000 of the
Company's domestic plans are set forth in the following tables:
2002
--------------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
------------ ------------ ------------
Change in benefit obligation:
Benefit obligation at the beginning of the year $ 22,842,997 $ 1,188,676 $ 6,604,492
Service cost 2,008,569 -- 37,441
Interest cost 1,782,579 86,661 453,466
Actuarial loss (gain) 4,234,510 143,724 (91,088)
Benefits paid (979,919) (161,420) (16,032)
Plan amendments 163,802 -- --
------------ ------------ ------------
Benefit obligation at the end of the year $ 30,052,538 $ 1,257,641 $ 6,988,279
------------ ------------ ------------
Change in plan assets:
Fair value of assets at the beginning of the year $ 14,931,149 $ 1,159,822 $ --
Actual gain (loss) on plan assets (1,098,291) (98,803) --
Employer contributions 4,842,948 358,755 16,032
Benefits paid (979,919) (161,420) (16,032)
------------ ------------ ------------
Fair value of assets at the end of the year $ 17,695,887 $ 1,258,354 $ --
------------ ------------ ------------
Funded status $(12,356,651) $ 712 $ (6,988,279)
Unrecognized transition asset (1,937) -- --
Unamortized prior service cost 395,879 -- 805,813
Unrecognized net actuarial loss 10,113,344 426,271 124,663
------------ ------------ ------------
Net amount recognized $ (1,849,365) $ 426,983 $ (6,057,803)
============ ============ ============
Amounts recognized in the balance sheet consist of:
(Accrued) prepaid benefit (liability) asset $ (6,422,980) $ 426,983 $ (6,960,844)
Intangible asset (included in other long-term assets) 395,879 -- 805,813
Accumulated other comprehensive loss 4,177,736 -- 97,228
------------ ------------ ------------
Net amount recognized $ (1,849,365) $ 426,983 $ (6,057,803)
============ ============ ============
F-15
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2001
--------------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
---------- ---------- ----
Change in benefit obligation:
Benefit obligation at the beginning of the year $ 17,304,298 $ 1,018,860 $ 6,247,977
Service cost 1,429,528 23,591 57,380
Interest cost 1,516,455 83,232 451,747
Actuarial (gain) loss 3,316,961 136,599 (139,705)
Benefits paid (724,245) (79,040) (12,907)
Plan Amendments -- 12,746 --
Curtailment -- (7,312) --
------------ ------------ ------------
Benefit obligation at the end of the year $ 22,842,997 $ 1,188,676 $ 6,604,492
------------ ------------ ------------
Change in plan assets:
Fair value of assets at the beginning of the year $ 14,371,743 $ 747,931 $ --
Actual gain (loss) on plan assets (459,925) 205,023 --
Employer contributions 1,743,576 285,908 12,907
Benefits paid (724,245) (79,040) (12,907)
------------ ------------ ------------
Fair value of assets at the end of the year $ 14,931,149 $ 1,159,822 $ --
------------ ------------ ------------
Funded status $ (7,911,848) $ (28,855) $ (6,604,492)
Unrecognized transition asset (64,513) -- --
Unamortized prior service cost 282,146 -- 1,082,497
Unrecognized net actuarial loss 3,760,787 78,245 181,784
------------ ------------ ------------
Net amount recognized $ (3,933,428) $ 49,390 $ (5,340,211)
============ ============ ============
Amounts recognized in the balance sheet consist of:
Accrued benefit liability $ (4,970,245) $ (28,855) $ (6,462,215)
Intangible asset (included in other long-term assets) 282,146 -- 1,082,497
Accumulated other comprehensive loss 754,671 78,245 39,507
------------ ------------ ------------
Net amount recognized $ (3,933,428) $ 49,390 $ (5,340,211)
============ ============ ============
2002
--------------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
---------- ---------- ----
Components of net periodic cost:
Service cost $ 2,008,569 $ -- $ 37,441
Interest cost 1,782,579 86,661 453,466
Expected return on plan assets (1,352,233) (105,654) --
Amortization of unrecognized transition (asset) obligation (62,576) -- --
Recognized prior service cost 50,069 -- 276,684
Recognized net (gain) loss 332,477 155 (33,967)
------------ ------------ ------------
Net periodic cost $ 2,758,885 $ (18,838) $ 733,624
============ ============ ============
F-16
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
2001
-----------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
---------- ---------- ----
Components of net periodic cost:
Service cost $ 1,429,528 $ 23,591 $ 57,380
Interest cost 1,516,455 83,232 451,747
Expected return on plan assets (1,307,742) (72,958) --
Amortization of unrecognized
transition (asset) obligation (62,576) 12,388 --
Recognized prior service cost 35,269 4,432 276,684
Recognized net (gain) loss -- 4,286 (20,198)
Curtailment -- 56,660 --
----------- ----------- -----------
Net periodic cost $ 1,610,934 $ 111,631 $ 765,613
=========== =========== ===========
2000
-----------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
---------- ---------- ----
Components of net periodic cost:
Service cost $ 1,038,538 $ 19,610 $ 47,166
Interest cost 1,183,740 75,141 446,953
Expected return on plan assets (1,318,962) (56,947) --
Amortization of unrecognized
transition (asset) obligation (62,576) 24,776 --
Recognized prior service cost 56,156 7,607 265,106
Recognized net (gain) loss (214,361) -- 36,520
----------- ----------- -----------
Net periodic cost $ 682,535 $ 70,187 $ 795,745
=========== =========== ===========
The weighted-average actuarial assumptions used as of December 31, 2002,
2001 and 2000, respectively, were:
2002 2001 2000
---- ---- ----
Discount rate 6.75% 7.25% 7.75%
Rate of compensation increase 4.50% 4.50% 5.50%
Expected long-term rate of return on plan assets 8.50% 9.00% 9.00%
Minimum pension liabilities for the underfunded Del Non-Union Plan and SERP are
included in the long-term pension liability on the accompanying consolidated
balance sheets. The minimum pension liability of approximately $5,477,000 and
$2,237,000 at December 31, 2002 and December 31, 2001, respectively, has been
recorded with a corresponding amount of an intangible asset of approximately
$1,202,000 and $1,365,000 and accumulated other comprehensive losses of
approximately $4,275,000 and $872,000 at December 31, 2002 and December 31,
2001, respectively. The accumulated other comprehensive losses are net of
deferred income taxes of approximately $1,619,000 and $348,000 at December 31,
2002 and 2001, respectively. The minimum pension liability will change from year
to year as a result of revisions to actuarial assumptions and experienced gains
or losses.
The Company contributes to a multi-employer pension plan for the benefit of its
union employees. This plan is a defined benefit plan based on years of service
and the costs recognized for 2002, 2001 and 2000 were approximately $447,000,
$439,000 and $431,000, respectively.
The Company maintains a defined contribution plan for the benefit of its
Canadian employees. The costs recognized for 2002, 2001 and 2000 were
approximately $57,000, $59,000 and $53,000 in U.S. dollars, respectively.
F-17
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(b) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan and related trust, covering
substantially all full-time non-union employees. Under the terms of the plan,
the Company may make contributions to the trust in cash, shares of Company stock
or other property in amounts as may be determined by the Board of Directors. The
Board of Directors authorized contributions of $300,000 for 2002, $300,000 for
2001 and $200,000 for 2000. On October 7, 2002, the Company funded its fiscal
2002 contribution of $300,000 to the Employee Stock Ownership Trust with 17,898
treasury shares (as restated for 5% stock dividend). As a result, an increase of
$34,764 was recorded to additional paid-in capital representing the cost of
treasury shares which were less than the market price on that date. On
October 4, 2001 the Company funded its fiscal 2001 contribution of $300,000 to
the Employee Stock Ownership Trust with 22,423 treasury shares (as restated for
5% stock dividend). As a result, an increase of $35,186 was recorded to
additional paid-in capital representing the cost of treasury shares which were
less than the market price on that date. On March 1, 2001 the Company funded its
fiscal 2000 contribution of $200,000 to the Employee Stock Ownership Trust with
21,832 treasury shares (as restated for 5% stock dividend). As a result, a
reduction of $57,228 was recorded to retained earnings in the first quarter of
2001 representing the cost of treasury shares in excess of the market price on
that date. At December 31, 2002, the trust held 548,427 shares of the Company's
common stock.
(c) EMPLOYEE 401(K) SAVINGS PLAN
The Company maintains an Employee 401(k) Savings Plan. The plan is a defined
contribution plan which is administered by the Company. All regular, full-time
employees are eligible for voluntary participation on the first day of the month
following the date of hire and having attained the age of twenty-one. The plan
provides for growth in savings through contributions and income from
investments. It is subject to the provisions of the Employee Retirement Income
Security Act of 1974, as amended. Plan participants are allowed to contribute a
specified percentage of their base salary. However, the Company retains the
right to make optional contributions for any plan year. Optional contributions
were not made in 2002, 2001 and 2000.
(8) SHAREHOLDERS' EQUITY
(a) STOCK OPTION PLANS
The 1994 Stock Plan, as amended (the 1994 Plan) provides for the granting of
incentive and non-incentive options and other stock-based awards. A total of
3,792,579 shares have been authorized for issuance under the 1994 Plan. At
December 31, 2002, non-incentive options have been the only awards issued under
the 1994 Plan. The exercise price of options granted under the 1994 Plan shall
not be less than the fair market value of the common stock at the date of the
grant. The Compensation Committee of the Board of Directors (the Committee)
determines the persons to whom options will be granted, the prices at which
options may be exercised, the vesting period and whether the options will be
incentive or non-incentive. Incentive options, if granted, are exercisable for a
period of up to ten years from the date of the grant. The exercise price of the
shares to be purchased shall be paid either in cash, delivery (i.e., surrender)
of shares of common stock owned by the optionee at the time of exercise of the
option, in installments payable in cash if permitted by the Committee or in any
combination of the foregoing.
Shares received by an optionee upon exercise of a non-incentive option may not
be sold or otherwise disposed of for a period (restricted period) determined by
the Committee upon grant of the option, which, if the Committee elects to have a
restricted period, shall be not less than six months or more than three years
from the date of the exercise, during which period the Company is entitled, in
the event the employment of the optionee with the Company terminates, to
repurchase the shares at the exercise price. Following the restricted period,
the Company shall have a right of first refusal to purchase the shares at fair
market value. Shares issuable upon exercise of options granted to date under the
1994 Plan are subject to a six-month restricted period. At December 31, 2002,
1,217,472 of the 2,402,649 options outstanding were exercisable under the 1994
Plan, at a weighted-average exercise price of $14.91.
The 1984 Stock Option Plan, as amended (the 1984 Plan), provided for the
granting of incentive and non-incentive options to purchase shares of the
Company's common stock at prices which are not less than the fair market value
of the common stock at the dates of grant. Options are exercisable as determined
by the Committee for a period up to ten years and one day from the date of
grant. Incentive options granted to a 10% stockholder must be granted at 110% of
fair market value and may be exercised up to five years from the date of grant.
Payment of the exercise price of options may be made in the same manner as
provided by the 1994 Plan, and shares issued upon exercise are subject to a
restricted period similar to that provided under the 1994 Plan. At December 31,
2001, all options outstanding under the 1984 Plan were exercised at a
weighted-average exercise price of $2.58. No further options will be granted or
are outstanding under the 1984 Plan.
F-18
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
Limited stock appreciation rights also may be granted under the 1994 Plan, which
will be effective only upon a change in control of the Company (as defined). To
date, no such appreciation rights were granted. These plans also accelerate the
exercisability of all unexercised options or stock appreciation rights
immediately in the event of a change in control of the Company.
In 2002, the Company acquired 418,378 shares (adjusted for the 5% stock
dividend) of its common stock from optionees in connection with stock option
exercises for approximately $9,103,000. The market value on the date of exercise
of shares previously owned for more than six months used by optionees to pay for
the exercise price was approximately $6,486,000. Additionally, the market value
of shares acquired from optionees to pay for income tax liabilities remitted to
taxing authorities by the Company, amounted to $2,617,000. The market value of
these acquisitions totaling $9,103,000 is reflected in the accompanying
consolidated statement of shareholders' equity.
Shares outstanding, option prices and option transactions during the last three
years, are summarized below:
1994 STOCK OPTION PLAN
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding December 31, 1999 1,561,321 $ 13.98
Granted 442,244 10.54
Exercised -- --
Fortfeited (8,268) 14.45
---------
Outstanding December 31, 2000 1,995,297 13.22
Granted 454,589 11.29
Exercised (152,000) 9.26
Fortfeited (8,048) 10.53
---------
Outstanding December 31, 2001 2,289,838 13.10
Granted 749,435 21.17
Exercised (608,206) 10.88
Fortfeited (28,418) 15.76
---------
Outstanding December 31, 2002 2,402,649 $ 16.15
=========
1984 STOCK OPTION PLAN
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
------ --------------
Outstanding December 31, 1999 365,943 $ 4.50
Granted -- --
Exercised (262,153) 5.27
Fortfeited -- --
--------
Outstanding December 31, 2000 103,790 2.58
Granted -- --
Exercised (103,790) 2.58
Fortfeited -- --
--------
Outstanding December 31, 2001 -- --
Granted -- --
Exercised -- --
Fortfeited -- --
--------
Outstanding December 31, 2002 -- $ --
========
F-19
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The following table summarizes information about stock options at December 31,
2002:
OUTSTANDING STOCK OPTIONS EXERCISABLE STOCK OPTIONS
------------------------- -------------------------
WEIGHTED- WEIGHTED-AVERAGE WEIGHTED-
RANGE OF REMAINING EXERCISE AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES EXERCISE PRICE
- --------------- ------ ---------------- ----- ------ --------------
$ 6.00 to $10.00 40,225 5.21 $ 8.98 0 $ 0.00
$10.01 to $15.00 1,099,394 5.71 $ 11.32 775,436 $ 11.75
$15.01 to $20.00 394,237 4.13 $ 17.07 227,742 $ 18.00
$20.01 to $25.00 796,259 7.06 $ 21.87 141,760 $ 21.77
$25.01 to $30.00 72,534 2.85 $ 25.55 72,534 $ 25.55
--------- ---------
$ 6.00 to $30.00 2,402,649 5.80 $ 16.15 1,217,472 $ 14.91
========= =========
(b) RECEIVABLES FOR STOCK OPTIONS EXERCISED
In 1984, the Company loaned an officer $367,000 in connection with the payment
of taxes arising from the exercise of stock options (the 1984 Loan). The Company
also loaned the officer $1,065,313 in 1988 (the 1988 Loan) and $1,100,000 in
1990 (the 1990 Loan), each in connection with the exercise of stock options and
the tax liability arising therefrom. These loans were payable in annual
installments. In addition, the 1988 Loan and the 1990 Loan agreements provided
that if the officer was employed by the Company at the time any interest or debt
payments were due, such payment would be forgiven.
Pursuant to an amendment to this officer's employment agreement, the 1984 Loan,
the 1988 Loan and the 1990 Loan were consolidated, effective as of July 1, 1999,
with the aggregate principal balance to be repaid, with interest at the rate of
6.0% per annum, in annual amounts of $140,000 for each year during the period
from 2000 through 2007 and a final payment of $82,250 on January 20, 2008,
provided that each payment of interest and principal will be forgiven when due
so long as the officer is then employed by, or then serves as a consultant to
the Company and, provided further, that the Company may (but is not required to)
forgive, during any year until 2007, in excess of $140,000 of principal.
Whenever the Company forgives any principal or interest owed by the officer to
the Company, the Company has agreed to pay to the officer such additional
payment (a "Gross-Up Payment") in an amount such that, after payment by the
officer of all Federal, state and local taxes and excise taxes if any, including
any such taxes imposed on the Gross-Up Payment, the officer retains an amount of
the Gross-Up Payment equal to such taxes imposed on the principal and interest
forgiven. This loan, which is a full recourse loan, must be secured by
collateral with a fair value of 110% of the unpaid principal. The loan balance
at December 31, 2002 was $782,250 and was collateralized by 168,961 shares of
the Company's common stock.
During 1992, the Company loaned another officer $130,000 to enable him to
exercise an option for 9,719 shares. The loan bears interest at the prime rate
and is payable in quarterly installments. As of December 31, 2002 the loan
balance was paid off and the 8,500 shares pledged to secure the loan were
released.
The balance of all loans made to officers is reflected as a reduction of
shareholders' equity in the accompanying consolidated financial statements.
F-20
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 2002 and 2001 consisted of the following:
2002 2001
----------- -----------
Salaries, wages, commissions and employee benefits $ 6,591,321 $ 4,941,141
Pension liabilities 2,727,481 4,866,855
Interest 374,760 321,878
Advertising and promotion costs 7,426,457 7,009,029
Other 4,579,274 6,169,984
----------- -----------
$21,699,293 $23,308,887
=========== ===========
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 $226,000 were recorded in the second quarter of 2001. During the
second quarter of 2002 an additional $45,000 in exit plan expenses were
recorded. As of December 31, 2002, the plant is closed, a total of 67 production
and clerical employees were terminated and all exit costs totaling $271,000 were
paid.
(10) EARNINGS PER SHARE
A reconciliation between the numerators and denominators of the basic and
diluted earnings per common share is as follows:
(Amounts in thousands,
except per share data)
2002 2001 2000
------- ------- -------
Net earnings (numerator) $19,503 $ 9,797 $ 4,717
------- ------- -------
Weighted-average common shares
(denominator for basic earnings per share) 9,047 8,860 8,757
Effect of dilutive securities:
Employee stock options 385 142 92
------- ------- -------
Weighted-average common and potential
common shares outstanding
(denominator for diluted earnings per share) 9,432 9,002 8,849
======= ======= =======
Basic earnings per share $ 2.16 $ 1.11 $ 0.54
======= ======= =======
Diluted earnings per share $ 2.07 $ 1.09 $ 0.53
======= ======= =======
Employee stock options for 496,000, 1,247,000 and 1,534,000 shares for 2002,
2001 and 2000, respectively, were not included in the net earnings per share
calculation because their effect would have been anti-dilutive.
F-21
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and legal actions arising in the
ordinary course of business, including environmental matters. The final
resolution of these matters on the Company's results of operations or liquidity
in a particular reporting period is not known. Management is of the opinion that
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position.
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 $550,000 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 $785,000 in selling and administrative expenses. The
charge of $785,000 had a negative impact of $0.05 per basic share on net
earnings in the second quarter of 2002 and for the year ended December 31, 2002.
During the third quarter of 2002, a trust was established with the intention of
entering into a Consent Decree with the United States and the State of New York
to settle all claims by the United States and the State of New York for past and
future response costs and future actions at the Site. In September 2002, the
Company paid $1,332,000 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 $18,000 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
$7,747,000 and be completed during the fourth quarter of 2003.
The Company leases executive office space, furniture, data processing equipment,
transportation equipment and warehouse space under terms of leases expiring
through 2007. Rent expense under these operating leases aggregated approximately
$2,827,000, $2,808,000 and $2,302,000 in 2002, 2001 and 2000, respectively. The
Company's obligations under non-cancelable leases are summarized as follows:
2003 $2,452,236
2004 1,975,857
2005 293,933
2006 189,275
2007 63,134
Thereafter --
----------
$4,974,435
==========
(12) FINANCIAL INSTRUMENTS
The carrying value of all financial instruments classified as a current asset or
current liability are deemed to approximate fair value because of the short
maturity of these instruments.
The carrying value of the Company's borrowings under the long-term revolving
credit agreement approximates fair value as such borrowings bear variable
interest rates which fluctuate with market conditions.
The fair value of the senior notes exceeds the carrying value at December 31,
2002 by approximately $2.5 million. The fair value of the senior notes is based
upon discounted cash flows using rates available to the Company for debt with
similar terms and maturities. The Company continually evaluates the benefits of
refinancing versus the related prepayment penalties. Because considerable
judgement is required in interpreting market data to develop estimates of fair
value, the estimates are not necessarily indicative of the amounts that could be
realized or would be paid in a current market exchange. The effect of using
different market assumptions or estimation methodologies may be material to the
estimated fair value amount.
F-22
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) COMPREHENSIVE INCOME (LOSS)
The Company's items of other comprehensive income (loss) include a foreign
currency translation adjustment and a minimum pension liability adjustment, net
of the related tax effect. The components of accumulated other comprehensive
loss at December 31, 2002, 2001, and 2000 are as follows:
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
FOREIGN CURRENCY
MINIMUM PENSION
TRANSLATION LIABILITY
ADJUSTMENT ADJUSTMENT TOTAL
----------------- --------------- --------------
Balance at December 31, 1999 $ (984,032) $ (45,074) $ (1,029,106)
Foreign currency translation adjustment (225,369) - (225,369)
Minimum pension liability adjustment,
net of taxes of $10,000. - (4,096) (4,096)
----------- ------------ -----------
Balance at December 31, 2000 (1,209,401) (49,170) (1,258,571)
Foreign currency translation adjustment (516,639) - (516,639)
Minimum pension liability adjustment,
net of taxes of $312,000. - (475,115) (475,115)
----------- ------------ -----------
Balance at December 31, 2001 (1,726,040) (524,285) (2,250,325)
Foreign currency translation adjustment 103,303 - 103,303
Minimum pension liability adjustment,
net of taxes of $1,270,000. - (2,131,329) (2,131,329)
----------- ------------ ------------
Balance at December 31, 2002 $(1,622,737) $ (2,655,614) $ (4,278,351)
=========== ============ ============
F-23
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) SEGMENT INFORMATION
The Company operates in two segments, Cosmetic and Pharmaceutical, that have
been organized by the products and services they offer. The Cosmetic segment's
principal products are nail care, nail color, color cosmetics, beauty
implements, bleaches and depilatories, personal care products and other related
cosmetic items. The Pharmaceutical segment's principal products are proprietary
oral analgesics, acne treatment products and first aid products. The accounting
policies of the segments are the same as those described in the summary of
significant accounting policies. The Company evaluates the performance of its
operating segments based on operating income. Certain assets, including
property, plant and equipment and deferred tax assets, are not allocated to the
identifiable segments; depreciation of unallocated assets is charged to the
Cosmetic segment.
2002 2001 2000
------------ ------------- -------------
Net sales
Cosmetic $283,857,000 $ 239,183,000 $ 209,781,000
Pharmaceutical 66,811,000 65,443,000 61,196,000
------------ ------------- -------------
Consolidated $350,668,000 $ 304,626,000 $ 270,977,000
============ ============= =============
Operating income
Cosmetic $ 23,543,000 $ 12,002,000 $ 5,306,000
Pharmaceutical 9,751,000 11,405,000 11,211,000
------------ ------------- -------------
Consolidated $ 33,294,000 $ 23,407,000 $ 16,517,000
============ ============= =============
Gains on sales of facility and land $ 2,428,000 $ - $ 362,000
------------ ------------- -------------
Interest expense, net $ 4,402,000 $ 6,779,000 $ 8,193,000
------------ ------------- -------------
Other expense, net $ 405,000 $ 466,000 $ 411,000
------------ ------------- -------------
Earnings before income taxes $ 30,915,000 $ 16,162,000 $ 8,275,000
------------ ------------- -------------
Identifiable assets
Cosmetic $139,465,000 $ 126,058,000 $ 133,090,000
Pharmaceutical 29,131,000 25,549,000 24,737,000
Corporate (unallocated assets) 42,386,000 38,594,000 36,403,000
------------ ------------- -------------
Consolidated $210,982,000 $ 190,201,000 $ 194,230,000
============ ============= =============
Depreciation and amortization
Cosmetic $ 7,229,000 $ 7,990,000 $ 7,286,000
Pharmaceutical 348,000 514,000 482,000
------------ ------------- -------------
Consolidated $ 7,577,000 $ 8,504,000 $ 7,768,000
============ ============= =============
Expenditures for property, plant and equipment
and long-lived assets
Cosmetic $ 1,910,000 $ 1,748,000 $ 2,297,000
Pharmaceutical 504,000 357,000 266,000
Corporate (unallocated assets) 6,664,000 3,433,000 5,287,000
------------ ------------- -------------
Consolidated $ 9,078,000 $ 5,538,000 $ 7,850,000
============ ============= =============
Sales to one customer by the Cosmetic and Pharmaceutical segments combined were
25.4%, 23.1% and 23.9% of consolidated net sales for 2002, 2001 and 2000,
respectively, and combined sales to another customer were 12.0%, 11.6% and 11.7%
of consolidated net sales for 2002, 2001 and 2000, respectively.
Operating income for 2002 and 2001, respectively, includes charges of $400,000
and $3,100,000 related to the K-Mart Chapter XI bankruptcy filing. Of this
amount, $400,000 and $2,300,000 was charged to the Cosmetics segment in 2002 and
2001, respectively, and $800,000 was charged to the Pharmaceutical segment in
2001.
Two customers accounted for 31.6% and 26.3% of the Company's accounts receivable
at December 31, 2002 and 2001, respectively.
F-24
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of quarterly operating results (in thousands of
dollars, except per share amounts):
YEAR ENDED DECEMBER 31, 2002
----------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net sales $79,940 $93,262 $95,215 $82,251
Cost of goods sold 37,377 44,979 48,024 40,966
Net earnings 4,948 4,589 5,096 4,870
Earnings per common share
Basic $ 0.55 $ 0.51 $ 0.56 $ 0.53
======= ======= ======= =======
Diluted $ 0.54 $ 0.48 $ 0.54 $ 0.51
======= ======= ======= =======
YEAR ENDED DECEMBER 31, 2001
----------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
Net sales $66,727 $80,512 $78,823 $78,564
Cost of goods sold 31,558 38,944 38,304 37,842
Net earnings 1,270 3,315 2,374 2,838
Earnings per common share
Basic $ 0.14 $ 0.37 $ 0.27 $ 0.32
======= ======= ======= =======
Diluted $ 0.14 $ 0.37 $ 0.26 $ 0.31
======= ======= ======= =======
Earnings per share calculations for each of the quarters are based on
weighted-average number of shares outstanding in each period. Therefore, the sum
of the quarters in a year does not necessarily equal the year's earnings per
share.
(16) 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 $3,335,000 which was
reduced by $160,000 for closing costs. In addition, $235,000 of the sales price
was paid by the purchaser on February 12, 2003. The land was included in
property, plant and equipment at December 31, 2001, with a book value of
$500,000. After transaction related costs of $407,000, the sale resulted in a
gain of $2,428,000 (approximately $1,500,000 after-tax, or $0.17 per basic
share). 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 $5,000,000 and cannot be
exercised before December 1, 2004 or after December 1, 2005.
F-25
SCHEDULE II
DEL LABORATORIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES (1) DEDUCTIONS(2) OF PERIOD
- ----------- --------- ------------ ------------- ---------
Year ended December 31, 2000 $1,300,000 $ 80,000 $ 380,000 $1,000,000
========== ========== ========= ==========
allowances for doubtful
accounts
Year ended December 31, 2001 $1,000,000 $4,057,000 $ 857,000 $4,200,000
========== ========== ========= ==========
allowances for doubtful
accounts
Year ended December 31, 2002 $4,200,000 $1,042,000 $ 280,000 $4,962,000
========== ========== ========= ==========
allowances for doubtful
accounts
(1) Additions charged to costs and expenses in the year ended December 31, 2002
and 2001 include $400,000 and $3,100,000, respectively, related to the K-Mart
Chapter XI bankruptcy filing.
(2) Uncollectible accounts written off, net of recoveries.
F-26
EXHIBIT INDEX
ITEM TITLE EXHIBIT NO. DESCRIPTION
Articles of 3.1 (a) Restated Certificate of Incorporation as filed
Incorporation with the Delaware Secretary of State on March 29,
and By-Laws 1996.
3.2 (b) Certificate of Amendment filed with the Delaware
Secretary of State on June 4, 1996.
3.3 (c) Certificate of Amendment of the Restated
Certificate of Incorporation filed with the
Delaware Secretary of State on June 3, 1998.
3.4 (a) By-Laws as amended through December 14, 1995.
Material 10.1 (d) Employee Pension Plan, effective January 1, 1997
Contracts (amended and restated).
10.2 Amendment No. 1 to Employee Pension Plan.
10.3 (d) Employee Stock Ownership Plan, effective January
1, 1997 (amended and restated).
10.4 Amendment No. 1 to Employee Stock Ownership Plan.
10.5 (d) 401(k) Plan effective January 1, 1997 (amended
and restated).
10.6 Amendment No. 1 to 401(k) Plan.
10.7 Amendment No. 2 to 401(k) Plan.
10.8 Amended and Restated Supplemental Executive
Retirement Plan.
10.9 1994 Stock Plan, as amended and restated on May
23, 2002.
10.10 (e) Annual Incentive Plan, as amended as of May 27,
1999.
10.11 (c) Amended and Restated Employment Agreement dated
as of July 1, 1999 between the Registrant and Dan
K. Wassong.
10.12 Amendment dated April 22, 2002 to Dan K. Wassong
Employment Agreement.
ITEM TITLE EXHIBIT NO. DESCRIPTION
10.13 Employment Agreement dated April 1, 2002 with
Charles J. Hinkaty.
10.14 (d) Employment Agreement with Harvey P. Alstodt,
dated April 1, 2001.
10.15 Amendment dated June 1, 2002 to Harvey P. Alstodt
Employment Agreement.
10.16 (d) Employment Agreement with William H. McMenemy,
dated April 1, 2001.
10.17 (d) Amendment to Employment Agreement with William H.
McMenemy, dated September 7, 2001.
10.18 (d) Employment Agreement With Enzo J. Vialardi, dated
April 1, 2001.
10.19 (d) Change in Control Agreement with Harvey P.
Alstodt, dated April 16, 2001.
10.20 (d) Change in Control Agreement with William H.
McMenemy, dated April 16, 2001.
10.21 Change in Control Agreement with Charles J.
Hinkaty, dated April 16, 2002.
10.22 (f) Life Insurance Agreement, dated as of February
18, 1993.
10.23 (g) Lease between Registrant and Coliseum Towers
Associates.
10.24 (d) Amended and Restated Loan Agreement dated as of
March 26, 2002 among the Registrant, as borrower,
Del Pharmaceuticals, Inc. ("DPI"), Parfums
Schiaperlli, Inc. ("Parfums"), Royce & Rader,
Inc. ("Royce") and 565 Broad Hollow Realty Corp.
("565"), as guarantors, and JP Morgan Chase, as
agent for the lenders.
10.25 (d) Amended and Restated Loan Agreement dated as
of March 26, 2002 among the Registrant, DPI,
Parfums, Royce, 565 and Jackson National Life
Insurance Company.
Code of Ethics 14.1 Code of Ethics.
ITEM TITLE EXHIBIT NO. DESCRIPTION
Subsidiaries of 21.1 List of Subsidiaries.
Registrant
Consents of 23.1 Consent of KPMG LLP dated March 25, 2003.
Experts and Counsel
Additional 99.1 Certification of Chief Executive Officer.
Exhibits 99.2 Certification of Chief Financial Officer.
(a) These exhibits were filed as exhibits to the Registrants Form 10-K for
the year ended December 31, 1995 as follows: Restated Certificate,
Exhibit 1; and By-Laws, Exhibit 2.
(b) This exhibit was filed as Exhibit 1 to the Registrant's Form 10-Q for
the quarter ended June 30, 1996.
(c) These exhibits were filed as exhibits to the Registrant's Form 10-K
for the year ended December 31, 1999, as follows: 3.3 above was filed
as Exhibit 3.3 and 10.11 above was filed as Exhibit 10.14 to the 1999
10-K.
(d) These exhibits were filed as exhibits to the Registrant's Form 10-K
for the year ended December 31, 2001, as follows: Exhibits 10.3, 10.5,
10.14, 10.16, 10.17, 10.18, 10.19, 10.20, 10.24 and 10.25 above were
filed, respectively, as Exhibits 10.2, 10.3, 10.16, 10.17, 10.18,
10.19, 10.20, 10.21, 10.24 and 10.25 to the 2001 10-K.
(e) This exhibit was filed as Exhibit B to the Registrant's Definitive
Proxy Statement dated May 27, 1999, relating to the Registrant's 1999
Annual Meeting of Stockholders.
(f) This exhibit was filed as Exhibit 9 to the Registrant's Form 10-K for
the year ended Deceber 31, 1993.
(g) This exhibit was filed as exhibit 10.1 to the Registrant's Form 10-Q
for the quarter ended September 30, 1997.