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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
-------
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 1-5439
DEL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-1953103
- -------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
178 EAB PLAZA, UNIONDALE, NEW YORK 11556
----------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 844-2020
-------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (X) NO ( )
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES (X) NO ( )
The number of shares of Common Stock, $1 par value, outstanding as of November
12, 2003 was 9,235,322.
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002 3
Consolidated Statements of Earnings for the three and nine
months ended September 30, 2003 and 2002 4
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 4. Controls and Procedures 19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 21
All other schedules and compliance information called for by the instructions to
Form 10-Q have been omitted since the required information is not present or not
present in amounts sufficient to require submission.
-2-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
(In thousands, except for share and per share data)
September 30 December 31
2003 2002
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,252 $ 501
Accounts receivable-less allowance for doubtful accounts
of $4,605 in 2003 and $4,962 in 2002 67,504 51,080
Inventories 86,914 79,913
Income taxes receivable 460 1,319
Deferred income taxes 7,934 7,934
Prepaid expenses and other current assets 3,388 2,981
--------- ---------
Total current assets 168,452 143,728
Property, plant and equipment, net 47,564 37,434
Intangibles arising from acquistions, net 7,871 8,380
Goodwill 6,282 6,282
Other assets 14,705 10,139
Deferred income taxes 5,019 5,019
--------- ---------
Total assets $ 249,893 $ 210,982
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 8,553 $ 8,396
Accounts payable 39,366 32,397
Accrued liabilities 24,354 21,699
--------- ---------
Total current liabilities 72,273 62,492
Long-term pension liability, less current portion 10,656 10,656
Deferred income taxes 4,348 4,348
Deferred liability 1,271 --
Long-term debt, less current portion 62,399 50,588
--------- ---------
Total liabilities 150,947 128,084
--------- ---------
Shareholders' equity:
Preferred stock $ .01 par value, authorized
1,000,000 shares; no shares issued -- --
Common stock $1 par value, authorized
20,000,000 shares; issued 10,000,000 shares 10,000 10,000
Additional paid-in capital 5,988 5,393
Accumulated other comprehensive loss (2,450) (4,278)
Retained earnings 100,148 86,232
--------- ---------
113,686 97,347
Less: Treasury stock at cost, 766,014 shares
in 2003 and 872,261 shares in 2002 (14,098) (13,667)
Receivables for stock options exercised (642) (782)
--------- ---------
Total shareholders' equity 98,946 82,898
--------- ---------
Total liabilities and shareholders' equity $ 249,893 $ 210,982
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
-3-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(In thousands, except for share and per share data)
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net sales $ 99,716 $ 95,215 $ 291,055 $ 268,417
Cost of goods sold 49,017 48,024 141,845 130,380
Selling and administrative expenses 41,931 37,672 121,735 112,752
Severance expenses (note 7) 119 -- 1,969 --
----------- ----------- ----------- -----------
Operating income 8,649 9,519 25,506 25,285
Other income (expense):
Gain on sale of land -- -- -- 2,428
Interest expense, net (954) (1,083) (3,008) (3,427)
Other expense, net (31) (81) (4) (297)
----------- ----------- ----------- -----------
Earnings before income taxes 7,664 8,355 22,494 23,989
Income taxes 3,013 3,259 8,578 9,356
----------- ----------- ----------- -----------
Net earnings $ 4,651 $ 5,096 $ 13,916 $ 14,633
=========== =========== =========== ===========
Earnings per common share:
Basic $ 0.50 $ 0.56 $ 1.52 $ 1.62
=========== =========== =========== ===========
Diluted $ 0.48 $ 0.54 $ 1.45 $ 1.56
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 9,230,000 9,095,000 9,170,000 9,023,000
=========== =========== =========== ===========
Diluted 9,723,000 9,418,000 9,585,000 9,391,000
=========== =========== =========== ===========
The accompanying notes are an integral part of the
consolidated financial statements.
-4-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
(In thousands)
(UNAUDITED)
SEPTEMBER 30
2003 2002
---- ----
Cash flows provided by (used in) operating activities:
Net earnings $ 13,916 $ 14,633
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 6,051 5,545
Provision for doubtful accounts (167) 1,073
Gain on sale of land -- (2,428)
Other non-cash operating items 140 128
Changes in operating assets and liabilities:
Accounts receivable (15,671) (7,912)
Inventories (5,561) (11,248)
Prepaid expenses and other current assets (636) (538)
Other assets (4,488) (1,586)
Accounts payable 6,371 11,394
Accrued liabilities 2,456 2,470
Deferred liability 1,271 --
Income taxes receivable / payable 2,461 (1,669)
-------- --------
Net cash provided by operating activities 6,143 9,862
-------- --------
Cash flows provided by (used in) investing activities:
Net proceeds from sale of land 235 2,940
Property, plant and equipment additions (14,601) (5,430)
-------- --------
Net cash used in investing activities (14,366) (2,490)
-------- --------
Cash flows provided by (used in) financing activities:
Principal borrowings under revolving credit agreement, net 11,000 --
Principal payments under mortgages (113) (265)
Principal payment under senior notes (8,000) (4,000)
Repayment of mortgage (3,865) --
Borrowings under mortgage and construction loan 12,312 --
Payment of capital lease obligations (78) --
Repayment on receivables for stock options exercised -- 13
Proceeds from the exercise of stock options 100 76
Acquisition of treasury stock (1,408) (2,491)
-------- --------
Net cash provided by (used in) financing activities 9,948 (6,667)
-------- --------
Effect of exchange rate changes on cash 26 (19)
-------- --------
Net increase in cash and cash equivalents 1,751 686
Cash and cash equivalents at beginning of year 501 2,688
-------- --------
Cash and cash equivalents at end of period $ 2,252 $ 3,374
======== ========
Supplemental disclosures:
Cash paid:
Interest $ 2,480 $ 2,577
Income taxes $ 6,161 $ 11,134
Non-cash items:
Income tax benefit arising from stock options exercised $ 1,467 $ 2,349
Shares tendered by optionees to exercise stock options $ 5,722 $ 6,196
Equipment acquired under capitalized leases $ 543 $ --
The accompanying notes are an integral part of the
consolidated financial statements.
-5-
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Del
Laboratories, Inc. and subsidiaries ("the Company") have been prepared in
accordance with accounting principles generally accepted in the United
States of America for interim financial information and with the
instructions to Form 10-Q. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
Interim results are not necessarily indicative of results for a full year.
On January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities". SFAS No. 146 requires that a
liability be recognized for costs associated with an exit or disposal
activity only when the liability is incurred. SFAS No. 146 also establishes
fair value as the objective for initial measurement of liabilities related
to exit or disposal activities. In accordance with the adoption of SFAS No.
146, other relocation costs and additional severance benefits as a result
of the plant closure described in note 7, will be recognized when such
benefits are incurred.
Effective January 1, 2003, the Company adopted the provisions of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others"
("FIN 45"). FIN 45 requires that at the inception of the guarantee, a
liability be recorded on the guarantor's balance sheet for the fair value
of the obligation undertaken in issuing the guarantee. In addition, FIN 45
requires disclosures about the guarantees that an entity has issued. The
adoption of FIN 45 did not have any effect on the Company's consolidated
results of operations, cash flows or financial position.
A summary of the Company's critical and significant accounting policies are
presented in its 2002 Form 10-K. Users of financial information produced
for interim periods are encouraged to refer to the footnotes contained in
the Form 10-K when reviewing interim financial results.
In the opinion of management, the accompanying interim consolidated
financial statements contain all material adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows of the Company for
interim periods.
2. STOCK OPTION PLANS
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" (APB No. 25), and related interpretations, in
accounting for its fixed plan stock options. Under APB No. 25, compensation
expense would be recorded if, on the date of grant, the market price of the
underlying stock exceeded its exercise price. Accordingly, no compensation
cost has been recognized. Had compensation cost for the stock option plans
been determined based on the fair value at the grant dates for awards under
the plans, consistent with the alternative method set forth under SFAS No.
123, "Accounting for Stock-Based Compensation", and SFAS No. 148
"Accounting for Stock-Based Compensation-Transition and Disclosure", the
Company's net earnings and net earnings per share would have been reduced.
The following table illustrates the effect on net earnings and net earnings
per share if the Company had applied the fair value recognition provisions
of SFAS No. 123, to stock based employee compensation:
-6-
2. STOCK OPTION PLANS, CONTINUED
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings, as reported $ 4,651 $ 5,096 $ 13,916 $ 14,633
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
net of related tax effects $ (581) $ (541) $ (1,730) $ (1,223)
-------- -------- -------- ----------
Pro forma net earnings $ 4,070 $ 4,555 $ 12,186 $ 13,410
======== ======== ======== ==========
Earnings per share:
Basic - as reported $ 0.50 $ 0.56 $ 1.52 $ 1.62
======== ======== ======== ==========
Basic - pro forma $ 0.44 $ 0.50 $ 1.33 $ 1.49
======== ======== ======== ==========
Diluted - as reported $ 0.48 $ 0.54 $ 1.45 $ 1.56
======== ======== ======== ==========
Diluted - pro forma $ 0.42 $ 0.48 $ 1.27 $ 1.43
======== ======== ======== ==========
The fair value of each option grant was estimated at the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions for the third quarters of 2003 and 2002,
respectively: dividend yields 0% and 0%; expected lives of 5.0 and 7.0
years; risk-free interest rates of 2.60% and 4.36%; and expected volatility
of 35.4% and 39.1%. The weighted-average fair value of options granted
during the third quarters of 2003 and 2002 were $8.76 and $10.73,
respectively.
Assumptions for the first nine months of 2003 and 2002, respectively, were:
dividend yields 0% and 0%; expected lives of 5.0 and 5.9 years; risk-free
interest rates of 2.51% and 4.42%; and expected volatility of 35.4% and
39.1%. The weighted-average fair value of options granted during the first
nine months of 2003 and 2002 were $8.19 and $9.92, respectively.
On April 22, 2003, the Financial Accounting Standards Board ("FASB")
determined that stock-based compensation should be recognized as a cost in
the financial statements and that such cost be measured according to the
fair value of the stock options. The FASB has not as yet determined the
methodology for calculating fair value and plans to issue an exposure draft
and final statement in 2004. We will continue to monitor communications on
this subject from the FASB in order to determine the impact on the
Company's consolidated financial statements.
3. INVENTORIES
Inventories are valued at the lower of cost (principally first-in /
first-out) or market value. The Company records reductions to the cost of
inventories based upon its forecasted plans to sell, historical scrap and
disposal rates and physical condition of the inventories. The components of
inventories were as follows:
September 30 December 31
2003 2002
---- ----
Raw Materials $ 45,990 $35,942
Work in Process 4,079 3,878
Finished Goods 36,845 40,093
-------- -------
$ 86,914 $79,913
======== =======
-7-
4. INTANGIBLES
Intangibles arising from acquisitions were as follows:
September 30, 2003
------------------
Gross Carrying Accumulated Net Book
Value Amortization Value
-------------- ------------ ---------
Intellectual property rights $ 10,558 $ 2,874 $ 7,684
Trademarks 3,000 2,813 187
-------- ------- -------
$ 13,558 $ 5,687 $ 7,871
======== ======= =======
December 31, 2002
-----------------
Gross Carrying Accumulated Net Book
Value Amortization Value
-------------- ------------ ---------
Intellectual property rights $ 10,558 $ 2,478 $ 8,080
Trademarks 3,000 2,700 300
-------- ------- -------
$ 13,558 $ 5,178 $ 8,380
======== ======= =======
Amortization expense was $170 and $170 for the three months ended September
30, 2003 and 2002, respectively, and amounted to $509 and $508 for the nine
months ended September 30, 2003 and 2002, respectively. The estimated
amortization expense for the fiscal years ending December 31, 2003, 2004,
2005, 2006 and 2007, is $678, $678, $528, $528 and $528, respectively. The
useful lives for intellectual property rights and trademarks are 20 years.
5. LONG - TERM DEBT
Long - term debt consisted of the following:
September 30 December 31
2003 2002
---- ----
9.5% senior notes $ 24,000 $ 32,000
Notes payable under revolving
credit agreement 33,000 22,000
Mortgages on land and buildings 13,487 4,984
Obligations under capital leases 465 -
-------- --------
$ 70,952 $ 58,984
Less current portion 8,553 8,396
-------- --------
$ 62,399 $ 50,588
======== ========
At December 31, 2002, the Company had an outstanding balance of $3,954
under a five-year mortgage on the land and buildings in North Carolina.
During the first quarter of 2003, the Company paid $89 of the mortgage and
refinanced the balance with a seven-year $12,480 combination mortgage and
construction loan facility. Of this facility, $12,312 was drawn down
through September 30, 2003, of which $3,865 was used to pay the outstanding
balance on the existing mortgage and $8,447 was used for funding of
construction costs in connection with the expansion in North Carolina. The
mortgage and construction loan facility provides construction funding as
funds are expended during the building expansion project. The mortgage
includes an interest rate based on LIBOR plus 1.75%, which totaled 2.87% as
of September 30, 2003, monthly principal payments beginning April 15, 2004
based on a 20 year amortization schedule, a balloon payment due in March
2010, and terms that provide for the maintenance of certain financial
ratios.
6. SALE OF LAND
On February 13, 2002, the Company sold 13.5 acres of vacant land in
Farmingdale, New York to an unrelated third party for gross proceeds of
$3,335, which was reduced by $160 for closing costs. In addition, $235 of
the sales price was paid by the purchaser on February 13, 2003, in
accordance with the original terms of the transaction. The land was
included in property, plant and equipment at December 31, 2001, with a book
value of $500. After transaction related costs of $407, the sale resulted
in a gain of $2,428, (approximately $1,457 after-tax, or $0.16 per basic
share) which was recorded in the first quarter of 2002. In connection with
this sale, an option was granted to the buyer for the remaining 8.5 acres
of improved land and buildings owned by the Company. The option is for a
purchase price of no less than $5,000 and cannot be exercised before
December 1, 2004 or after December 1, 2005.
-8-
7. CLOSURE OF FARMINGDALE PLANT
On May 30, 2003, the Company announced the formal plan for the transfer of
its principal manufacturing operations, for both the Cosmetic and
Pharmaceutical segments, to Rocky Point, North Carolina from Farmingdale,
New York. Pursuant to the Company's formal severance policy for non-union
employees and, severance benefits due under the union contract resulting
from the plant closure, a charge of $1,850 ($1,140 after-tax, or $0.12 per
basic share) for severance costs and related benefits for approximately 370
union and non-union employees associated with this move was recorded in the
second quarter of 2003. Additional severance benefits earned by employees
being terminated will be recognized as a charge in the financial statements
as such severance benefits are earned. During the third quarter of 2003, a
charge of $119 ($73 after-tax, or $0.01 per basic share) was recorded for
such earned severance benefits, net of adjustments of $15 to the initial
accrual. Through September 30, 2003, $18 of relocation and other move
related costs were expensed as incurred. The Company estimates that a total
of approximately $162 (Cosmetic segment - $106; Pharmaceutical segment -
$56), will be incurred for additional severance, relocation and other move
related costs during the fourth quarter of 2003 and approximately $102
(Cosmetic segment - $66; Pharmaceutical segment - $36), will be incurred
for such costs in the first six months of 2004. As of September 30, 2003,
58 union and non-union employees have been terminated and $67 in severance
benefits was paid.
A summary of the activity in the accrual for the plant closure was as
follows:
Balance December 31, 2002 $ -
Provision 1,850
---------
Balance June 30, 2003 $ 1,850
---------
Provision 134
Payments (67)
Adjustments (15)
---------
Balance September 30, 2003 $ 1,902
=========
-9-
8. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to common
shareholders (which equals the Company's recorded net earnings) by the
weighted-average number of common shares outstanding during the period.
Diluted earnings per share reflects the potential dilution that could occur
if securities or other contracts to issue common stock, such as stock
options, were exercised, converted into common stock or otherwise resulted
in the issuance of common stock.
On November 7, 2002, the Company's Board of Directors approved a 5% stock
dividend. As a result, 434,835 shares of treasury stock were issued on
December 27, 2002 to shareholders of record on November 29, 2002.
Accordingly, the weighted-average common shares outstanding in the
consolidated statement of earnings for the three and nine months ended
September 30, 2002, have been adjusted to reflect the dividend.
A reconciliation between the numerators and denominators of the basic and
diluted earnings per common share were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
------- ------- -------- --------
Net earnings (numerator) $ 4,651 $ 5,096 $ 13,916 $ 14,633
------- ------- -------- --------
Weighted-average common shares
(denominator for basic
earnings per share) 9,230 9,095 9,170 9,023
Effect of dilutive securities:
Employee stock options 493 323 415 368
------- ------- -------- --------
Weighted-average common and potential
common shares outstanding
(denominator for diluted
earnings per share) 9,723 9,418 9,585 9,391
======= ======= ======== ========
Basic earnings per share $0.50 $0.56 $1.52 $1.62
======= ======= ======== ========
Diluted earnings per share $0.48 $0.54 $1.45 $1.56
======= ======= ======== ========
Employee stock options to purchase approximately 872,000 shares for the
three months ended September 30, 2002, and 461,000 and 552,000 shares for
the nine months ended September 30, 2003 and 2002, respectively, were not
included in the net earnings per share calculation because their effect
would have been anti-dilutive. There were no anti-dilutive shares for the
three months ended September 30, 2003.
As a result of stock options exercised during the nine months ended
September 30, 2003, the corresponding tax benefit of $1,467 was recorded as
a reduction to income taxes payable and as an increase in additional
paid-in capital.
9. COMPREHENSIVE INCOME
The components of comprehensive income for the three and nine months ended
September 30, 2003 and 2002 were as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net earnings $ 4,651 $ 5,096 $ 13,916 $14,633
Foreign currency translation (8) (431) 1,828 10
------- ------- -------- -------
Total comprehensive income $ 4,643 $ 4,665 $ 15,744 $14,643
======= ======= ======== =======
-10-
10. SEGMENT INFORMATION
The Company operates in two segments, Cosmetic and Pharmaceutical, that
have been organized by the products and services they offer. The Cosmetic
segment's principal products are nail care, nail color, color cosmetics,
beauty implements, bleaches and depilatories, personal care products and
other related cosmetic items. The Pharmaceutical segment's principal
products are proprietary oral analgesics, acne treatment products and first
aid products. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. The Company
evaluates the performance of its operating segments based on operating
income. Certain assets, including property, plant and equipment and
deferred tax assets, are not allocated to the identifiable segments;
depreciation of unallocated assets is charged to the Cosmetic segment.
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales:
Cosmetic $ 79,641 $ 77,921 $234,475 $217,901
Pharmaceutical 20,075 17,294 56,580 50,516
-------- -------- -------- --------
Consolidated $ 99,716 $ 95,215 $291,055 $268,417
======== ======== ======== ========
Operating income:
Cosmetic $ 4,855 $ 6,547 $ 17,042 $ 18,459
Pharmaceutical 3,794 2,972 8,464 6,826
-------- -------- -------- ---------
Consolidated $ 8,649 $ 9,519 $ 25,506 $ 25,285
Other income (expense):
Gain on sale of land $ - $ - $ - $ 2,428
Interest expense, net $ (954) $ (1,083) $ (3,008) $ (3,427)
Other expense, net $ (31) $ (81) $ (4) $ (297)
-------- --------- -------- --------
Earnings before income taxes $ 7,664 $ 8,355 $ 22,494 $ 23,989
======== ======== ======== ========
Depreciation and amortization:
Cosmetic $ 1,918 $ 1,847 $ 5,757 $ 5,298
Pharmaceutical 107 89 294 247
-------- -------- --------- --------
Consolidated $ 2,025 $ 1,936 $ 6,051 $ 5,545
======== ======== ========= ========
For the three months ended September 30, 2003, severance expense of $119
was included in the operating income of the segments, as follows: Cosmetic
- $77 and Pharmaceutical - $42. For the nine months ended September 30,
2003, severance expense of $1,969 was included in the operating income of
the segments, as follows: Cosmetic - $1,280 and Pharmaceutical - $689.
Operating income for the nine months ended September 30, 2003 includes an
estimated recovery of $511, recorded in the second quarter of 2003, related
to a 2001 charge for the K-Mart Chapter XI bankruptcy filing. Of this
amount $431, or 84% was attributable to the Cosmetic segment and $80 or 16%
was attributable to the Pharmaceutical segment.
-11-
11. COMMITMENTS AND CONTINGENCIES
In September 2001, the Company received notice from the Environmental
Protection Agency ("EPA") that it was, along with 81 others, a Potentially
Responsible Party regarding a Superfund Site ("the Site") located in Glen
Cove, New York. According to the notice received from the EPA, the
Company's involvement related to empty drums coming to the Site in 1977 and
1978. In the third quarter of 2001, the Company recorded an estimate of
$550 in selling and administrative expenses based on information received
from the EPA as to its potential liability for the past remediation
activities. In October 2001, the Company became a member of a Joint Defense
Group ("the JDG"). In the second quarter of 2002, the EPA and the JDG
agreed in principle to the amounts of payments required to settle past and
future liabilities under the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA") with regard to the Site. Pursuant
to an agreement among JDG members as to how to allocate such payment
amounts, the Company recorded, in the second quarter of 2002, an additional
estimate of $785 in selling and administrative expenses. The charge of $785
had a negative impact of $0.05 per basic share on net earnings in the
second quarter of 2002 and for the year ended December 31, 2002. During the
third quarter of 2002, a trust was established with the intention of
entering into a Consent Decree with the United States and the State of New
York to settle all claims by the United States and the State of New York
for past and future response costs and future actions at the Site. In
September 2002, the Company paid $1,332 into a trust account which was held
in escrow, together with payments by the other members of the JDG, for the
eventual settlement with the EPA of the Company's potential liability under
CERCLA. During the third quarter of 2002, the Company also paid into the
same trust account $18 for the eventual settlement of the Company's
potential liability for natural resource damages ("NRD") claims, which also
are expected to be settled in the Consent Decree. During the second quarter
of 2003, the United States, the State of New York and the Federal District
Court approved the aforementioned Consent Decree.
12. OPERATING LEASES
The Company's corporate offices are located in approximately 48,000 square
feet of leased space in Uniondale, New York. On July 17, 2003, the Company
entered into an agreement to extend this lease to December 31, 2014, and
simultaneously entered into a lease agreement through December 31, 2014 for
approximately 41,000 additional square feet of leased space within the same
building in Uniondale, New York. The Company will transfer all
administrative offices currently located in Farmingdale, N.Y. to Uniondale,
N.Y. and consolidate the corporate and administrative offices at the
Uniondale, N.Y. facility. The total payment obligation for these leases
approximates $28,670 as shown in the following table:
Payments due by period
---------------------------------------
Less than 1 year $ 787
1 - 2 years 2,019
2 - 3 years 2,417
3 - 5 years 5,071
After 5 years 18,376
------
Total $ 28,670
========
The deferred liability on the accompanying consolidated balance sheet as of
September 30, 2003, represents deferred rent expense, as well as a payment
received by the Company from the lessor at the lease inception, which will
be recorded as a reduction of rent expense over the life of the lease.
-12-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
-----------------------------------------------------------------------
(In thousands, except per share data)
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The Company makes estimates and assumptions in the preparation of its
consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America. Actual results could differ
significantly from those estimates under different assumptions and conditions.
The Company believes that the following discussion addresses the Company's most
critical accounting policies, which are those that are most important to the
portrayal of the Company's financial condition and results of operations and
which require management's most difficult and subjective judgments, often as a
result of the need to make estimates about the effect of matters that are
inherently uncertain. The following is a brief discussion of the more critical
accounting policies employed by the Company.
REVENUE RECOGNITION
The Company sells its products to chain drug stores, mass volume retailers,
supermarkets, wholesalers and overseas distributors. Sales of such products are
denominated in U.S. dollars and sales in Canada are denominated in Canadian
dollars. The Company's accounts receivable reflect the granting of credit to
these customers. The Company generally grants credit based upon an analysis of
the customer's financial position and previously established buying and selling
patterns. The Company does not bill customers for shipping and handling costs
and, accordingly, classifies such costs as selling and administrative expense.
Revenues are recognized and discounts are recorded when merchandise is shipped.
Net sales are comprised of gross revenues less returns, various promotional
allowances and trade discounts and allowances. The Company allows customers to
return their unsold products when they meet certain criteria as outlined in the
Company's sales policies. The Company regularly reviews and revises, as deemed
necessary, its estimate of reserves for future sales returns based primarily
upon actual return rates by product and planned product discontinuances. The
Company records estimated reserves for future sales returns as a reduction of
sales, cost of sales and accounts receivable. Returned products which are
recorded as inventories are valued based on estimated realizable value. The
physical condition and marketability of the returned products are the major
factors considered by the Company in estimating realizable value. Actual
returns, as well as estimated realizable values of returned products, may differ
significantly, either favorably or unfavorably, from estimates if factors such
as economic conditions, customer inventory levels or competitive conditions
differ from expectations.
PROMOTIONAL ALLOWANCES AND CO-OPERATIVE ADVERTISING
The Company has various performance-based arrangements with retailers to
reimburse them for all or a portion of their promotional activities related to
the Company's products. These sales incentives offered voluntarily by the
Company to customers, without charge, that can be used in or that are
exercisable by a customer as a result of a single exchange transaction, are
recorded as a reduction of net sales at the later of the sale or the offer, and
primarily allow customers to take deductions against amounts owed to the Company
for product purchases. The Company also has co-operative advertising
arrangements with retail customers to reimburse them for all or a portion of
their advertising of the Company's products. The estimated liabilities for these
co-operative advertising arrangements are recorded as advertising expense as
incurred, or in the period the related revenue is recognized, depending on the
terms of the arrangement, and included in selling and administrative expenses,
since the Company receives an identifiable benefit from retail customers for an
amount equal to or less than the fair value of such advertising cost. These
arrangements primarily allow retail customers to take deductions against amounts
owed to the Company for product purchases. The Company regularly reviews and
revises the estimated accruals for these promotional allowance and cooperative
advertising programs. Actual costs incurred by the Company may differ
significantly, either favorably or unfavorably, from estimates if factors such
as the level and success of the retailers' programs or other conditions differ
from our expectations.
-13-
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is principally
determined by the first-in, first-out method. The Company records a reduction to
the cost of inventories based upon its forecasted plans to sell, historical
scrap and disposal rates and the physical condition of the inventories. These
reductions are estimates, which could vary significantly, either favorably or
unfavorably, from actual requirements if future economic conditions, the timing
of new product introductions, customer inventory levels, fashion-oriented color
cosmetic trends or competitive conditions differ from our expectations.
PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS
Property, plant and equipment is recorded at cost and is depreciated on a
straight-line basis over the estimated useful lives of such assets. Leasehold
improvements are amortized on a straight-line basis over the lesser of the
estimated useful lives or the lease term. Changes in circumstances, such as
technological advances, changes to the Company's business model or changes in
the Company's capital strategy could result in the actual useful lives differing
from the Company's estimates. In those cases where the Company determines that
the useful life of property, plant and equipment should be shortened, the
Company would depreciate the net book value in excess of the salvage value, over
its revised remaining useful life, thereby increasing depreciation expense.
Factors such as changes in the planned use of equipment, fixtures, software or
planned closing of facilities could result in shortened useful lives.
Intangible assets with determinable lives and other long-lived assets, other
than goodwill, are reviewed by the Company for impairment whenever events or
changes in circumstances indicate that the carrying amount of any such asset may
not be recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to the future net cash flows
expected to be generated by the asset. If the sum of the undiscounted cash flows
(excluding interest) is less than the carrying value, the Company recognizes an
impairment loss, measured as the amount by which the carrying value exceeds the
fair value of the asset. The estimate of cash flow is based upon, among other
things, certain assumptions about expected future operating performance. The
Company's estimates of undiscounted cash flow may differ from actual cash flow
due to, among other things, technological changes, economic conditions, changes
to its business model or changes in its operating performance.
Goodwill must be tested annually for impairment at the reporting unit level. The
Company's reporting units are its Cosmetic and Pharmaceutical segments. If an
indication of impairment exists, the Company is required to determine if such
reporting unit's implied fair value is less than its carrying value in order to
determine the amount, if any, of the impairment loss required to be recorded.
The testing performed as of January 1, 2003, indicated that there was no
impairment to goodwill.
The remaining useful lives of intangible assets subject to amortization are
evaluated each reporting period to determine whether events and circumstances
warrant a revision to the remaining period of amortization. If the estimate of
an intangible asset's remaining useful life is changed, the remaining carrying
amount of the intangible asset should be amortized prospectively over that
revised remaining useful life.
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.
-14-
RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2003 VERSUS SEPTEMBER 30, 2002
Consolidated net sales for the third quarter of 2003 were $99,716, an increase
of 4.7% compared to third quarter 2002 net sales of $95,215. Consolidated net
sales for the nine months ended September 30, 2003 were $291,055, an increase of
8.4% compared to the first nine months of 2002 net sales of $268,417.
The Cosmetic segment net sales for the third quarter of 2003 were $79,641, an
increase of 2.2% compared to $77,921 for the third quarter of 2002. Net sales of
Sally Hansen Healing Beauty and higher net sales of N.Y.C. New York Color were
partially offset by reduced sales of Naturistics. Cosmetic net sales for the
first nine months of 2003 were $234,475, an increase of 7.6% compared to
$217,901 for the first nine months of 2002. Net sales increases for the first
nine months of 2003 were partially offset by lower volume in the Naturistics
brand and increased returns throughout the Cosmetic segment product line. The
increased returns were primarily due to planogram changes during the first six
months by retail customers and the elimination of the Naturistics line by
certain retail customers. The planogram changes by retailers occurred earlier in
2003 compared to the prior year, and therefore returns in the third quarter were
below the levels of the first and second quarters and it is anticipated that
returns in the fourth quarter will also be below the levels of the first and
second quarters. The product mix within the Naturistics cosmetics brand is being
repositioned in order to facilitate the introduction of a sub-brand of lip gloss
items called Miss Kiss. Sally Hansen, the core brand of the Cosmetics segment,
remains the number one brand in the mass market nail care category with a 26%
share of market for the third quarter, as reported by ACNielsen.
The Pharmaceutical segment net sales for the third quarter of 2003 were $20,075,
an increase of 16.1% compared to $17,294 in 2002. Pharmaceutical net sales for
the first nine months of 2003 were $56,580, an increase of 12% compared to
$50,516 in 2002. The third quarter increase is primarily due to volume growth in
the Orajel brand. Orajel, the core brand of the Pharmaceutical segment,
continues its leadership position in the oral analgesics category, with a 30%
share of market for the third quarter, as reported by Information Resources,
Inc. The nine month increase is due primarily to volume growth in the Orajel
brand and increased sales of the Dermarest brand of psoriasis and eczema
treatments.
Cost of goods sold for the third quarter of 2003 was $49,017 or 49.2% of net
sales, compared to $48,024 or 50.4% of net sales in 2002. The improvement is due
to improved product mix in the Pharmaceutical segment. Cost of goods sold for
the first nine months of 2003 was $141,845 or 48.7% of net sales, compared to
$130,380 or 48.6% of net sales in 2002.
Selling and administrative expenses for the third quarter of 2003 were $41,931
or 42.1% of net sales compared to $37,672 or 39.6% of net sales in 2002. The
increase is principally attributable to higher advertising and display costs of
approximately $2,350,000, primarily in support of the new Sally Hansen Healing
Beauty product line and the core Sally Hansen franchise. Selling and
administrative expenses for the first nine months of 2003 were $121,735, or
41.8% of net sales, compared to $112,752 or 42.0% of net sales in 2002. The
first nine months of 2003 include an estimated recovery of $511 recorded in the
second quarter of 2003, related to the K-Mart Chapter XI bankruptcy filing for
which provisions were recorded in prior years.
-15-
On May 30, 2003, the Company announced a formal plan for the transfer of its
principal manufacturing operations, for both the Cosmetic and Pharmaceutical
segments, to Rocky Point, North Carolina from Farmingdale, N.Y. Pursuant to the
Company's formal severance policy for non-union employees and, severance
benefits due under the union contract resulting from the plant closure, a charge
of $1,850 ($1,140 after-tax, or $0.12 per basic share) for severance costs and
related benefits for approximately 370 union and non-union employees associated
with this move was recorded in the second quarter of 2003. An additional charge
of $119 ($73 after-tax, or $0.01 per basic share) was recorded in the third
quarter of 2003. The Company projects that an additional $109 (Cosmetic segment
- - $71; Pharmaceutical segment - $38) will be incurred in the fourth quarter of
2003, and $60 (Cosmetic segment - $39; Pharmaceutical segment - $21) during the
first six months of 2004. Additional severance benefits earned by employees
being terminated will be recognized as a charge in the financial statements as
such severance benefits are earned. In addition, it is estimated that
approximately $53 (Cosmetic segment - $35; Pharmaceutical segment - $18) will be
incurred in the fourth quarter of 2003 and approximately $42 (Cosmetic segment
$27; Pharmaceutical segment - $15) during the first six months of 2004 for
relocation and other costs. Of the total severance, additional severance,
relocation and other move related costs of $2,233, $67 was paid in the third
quarter of 2003 and it is projected that $647 will be paid in the fourth quarter
of 2003, and $1,519, will be paid during the first six months of 2004. The move
to North Carolina will consolidate the Company's principal manufacturing
operations with its principal distribution facility and result in improved
operating efficiencies and reduced manufacturing expenses.
Results for the first nine months ended September 30, 2002 include a gain for
the sale of land. In the first quarter of 2002, the Company sold 13.5 acres of
vacant land in Farmingdale, New York to an unrelated third party for gross
proceeds of $3,335 which was reduced by $160 for closing costs. In addition,
$235 of the sales price was paid by the purchaser on February 12, 2003 in
accordance with the original terms of the transaction. The land was included in
property, plant and equipment at December 31, 2001, with a book value of $500.
After transaction related costs of $407, a gain of $2,428 was recorded in the
first quarter of last year. The gain of $2,428, or $1,457 after tax, increased
basic earnings per share by $0.16 for the first quarter of last year. In
connection with this sale, an option was granted to the buyer for the remaining
8.5 acres of improved land and buildings owned by the Company. The option is for
a purchase price of no less than $5,000 and cannot be exercised before December
1, 2004 or after December 1, 2005.
Operating income for the third quarter of 2003 was $8,649 or 8.7% of net sales,
compared to $9,519 or 10.0% of net sales for the third quarter of 2002. The
operating income for the third quarter of 2003 includes a charge of $119 related
to severance costs associated with the transfer of manufacturing operations to
North Carolina. Operating income for the first nine months of 2003 was $25,506
or 8.8% of net sales, compared to $25,285 or 9.4% of net sales in 2002. The nine
months results for 2003 include charges of $1,969 for severance costs of which
$1,850 was recorded in the second quarter and $119 was recorded in the third
quarter of 2003.
Interest expense, net of interest income, for the third quarter of 2003 was
$954, a reduction of 12% from net interest expense of $1,083 reported for the
third quarter of 2002. Interest expense, net of interest income, for the first
nine months of 2003 was $3,008, a reduction of 12.2% from the net interest
expense of $3,427 recorded for the first nine months of 2002. The decrease in
net interest expense for the third quarter and first nine months of 2003 is due
primarily to a reduction of approximately 120 basis points in average borrowing
rates.
Income taxes are based on the Company's expected annual effective tax rate of
38.1% in 2003. The decrease from the rate of 39.0% used for the first nine
months of 2002 is primarily due to the benefit of a reduction in the Canadian
Statutory tax rate.
Net earnings for the third quarter of 2003 were $4,651 or $0.50 per basic share,
compared to the net earnings of $5,096 or $0.56 per basic share reported in the
third quarter of 2002. Net earnings for the first nine months of 2003 were
$13,916 or $1.52 per basic share compared to net earnings for the first nine
months of 2002 of $14,633 or $1.62 per basic share. The net earnings for the
first nine months of 2003 include after-tax charges of $1,213 or $0.13 per basic
share for severance costs. The net earnings for the first nine months of 2002
include an after-tax gain of $1,457 or $0.16 per basic share from the sale of
vacant land.
-16-
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2003 the Company had cash and cash equivalents of $2,252
compared to $501 at December 31, 2002 and $3,374 at September 30, 2002.
Net cash provided by operating activities for the nine months ended September
30, 2003 was $6,143, primarily due to net earnings of $13,916, depreciation of
$6,051 and increases in accounts payable of $6,371, partially offset by
increases in accounts receivable of $15,671, due to the timing of increased
sales, and inventories of $5,561. The increase in inventories and accounts
payable is due to the timing of purchases to support projected sales levels.
Net cash used in investing activities of $14,366 for the nine months ended
September 30, 2003, is principally due to expenditures for construction related
to the expansion of the manufacturing and distribution facility located in North
Carolina. On February 12, 2003, the Company received $235 representing the
remaining proceeds due from the sale of vacant land in the first quarter of
2002. The sale resulted in an after-tax gain of $1,457 ($0.16 per basic share)
which was recorded in the first quarter of 2002. In connection with this sale,
an option was granted to the buyer for the remaining 8.5 acres of improved land
and buildings owned by the Company. The option is for a purchase price of no
less than $5,000 and cannot be exercised before December 1, 2004 or after
December 1, 2005.
Net cash provided by financing activities for the nine months ended September
30, 2003, was $9,948 principally due to an additional $11,000 of net borrowings
under the revolving credit agreement and borrowings of $12,312 related to the
refinancing of the mortgage on the land and buildings in North Carolina,
partially offset by a principal payment of $8,000 under the senior notes. At
December 31, 2002, the Company had an outstanding balance of $3,954 under a
five-year mortgage on the land and buildings in North Carolina. During the first
nine months of 2003, the Company paid $89 of the mortgage and refinanced the
balance with a seven-year $12,480 combination mortgage and construction loan
facility. Of this facility, $12,312 was drawn as of September 30, 2003, of which
$3,865 was used to pay the outstanding balance on the existing mortgage and
$8,447 was used for funding of construction costs in connection with the
expansion in North Carolina. The mortgage and construction loan facility
provides construction funding as funds are expended during the building
expansion project. The mortgage includes an interest rate based on LIBOR plus
1.75%, which totaled 2.87% as of September 30, 2003, monthly principal payments
beginning April 15, 2004 based on a 20 year amortization schedule, a balloon
payment due in March 2010, and terms that provide for the maintenance of certain
financial ratios.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual obligations as of September 30, 2003, the
Company has included the following table:
Payments Due By Period
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Less
Than 1 - 2 2 - 3 3 - 5 After
Total 1 Year Years Years Years 5 Years
----- ------ ----- ----- ----- -------
Long-term debt $ 37,487 $ 8,443 $ 17,973 $ 858 $ 2,724 $ 7,489
Revolving credit agreement 33,000 -- 33,000 -- -- --
Capital lease 465 110 118 126 111 --
Operating leases 32,788 3,284 3,036 2,826 5,267 18,375
Construction commitment (a) 960 960 -- -- -- --
-------- -------- -------- -------- -------- --------
Total contractual obligations $104,700 $ 12,797 $ 54,127 $ 3,810 $ 8,102 $ 25,864
======== ======== ======== ======== ======== ========
(a) The timing of the payments are based on the current construction timetable.
-17-
The Company's corporate offices are located in approximately 48,000 square feet
of leased space in Uniondale, New York. On July 17, 2003, the Company entered
into an agreement to extend this lease to December 31, 2014, and simultaneously
entered into a lease agreement to December 31, 2014 for approximately 41,000
additional square feet of leased space within the same building in Uniondale,
New York, in order to transfer all administrative offices currently located in
Farmingdale, N.Y. to Uniondale, N.Y. and result in the consolidation of the
Company's corporate and administrative offices at the Uniondale, N.Y. facility.
The Company believes that cash flows from operations, cash on hand and amounts
available from the credit facility and the combination mortgage and construction
loan will be sufficient to enable the Company to meet its anticipated cash
requirements through 2004. However, there can be no assurance that the
combination of cash flow from future operations, cash on hand and amounts
available from the credit facility and the combination mortgage and construction
loan will be sufficient to meet the Company's cash requirements. Additionally,
in the event of a decrease in demand for its products or reduced sales, such
developments, if significant, would reduce the Company's cash flow from
operations and could adversely affect the Company's ability to achieve certain
financial covenants under the senior note and revolving credit agreements. If
the Company is unable to satisfy such financial covenants, the Company could be
required to adopt one or more alternatives, such as reducing or delaying certain
operating expenditures and/or delaying capital expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN No. 46") which stated that if an entity has a
controlling financial interest in a variable interest entity, the assets,
liabilities and results of activities of the variable interest entity should be
included in the consolidated financial statements of the entity. FIN No. 46 also
stated that its provisions were effective immediately for all arrangements
entered into after January 31, 2003 and effective for the first interim or
annual period ending after December 15, 2003 for entities that existed prior to
February 1, 2003. FIN No. 46 has been the subject of significant continuing
interpretation by the FASB, and changes to its complex requirements appear
likely before the end of 2003. The Company does not expect that the adoption of
FIN No. 46 will have an impact on the Company's consolidated financial
statements.
On April 22, 2003, the Financial Accounting Standards Board ("FASB") determined
that stock-based compensation should be recognized as a cost in the financial
statements and that such cost be measured according to the fair value of the
stock options. The FASB has not as yet determined the methodology for
calculating fair value and plans to issue an exposure draft and final statement
in 2004. We will continue to monitor communications on this subject from the
FASB in order to determine the impact on the Company's consolidated financial
statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies the
accounting for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities under SFAS No. 133. In
particular, SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristics of a derivative and when a
derivative contains a financing component that warrants special reporting in the
statement of cash flows. SFAS No 149 is effective for derivative contracts
entered into or modified after June 30, 2003. As the Company does not have any
derivative instruments required to be reported under SFAS No. 149, the adoption
of this statement did not have an impact on the Company's consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how freestanding financial instruments, those
financial instruments that have characteristics of both liabilities and equity,
should be classified on a Company's balance sheet. The requirements of SFAS No.
150 require that financial instruments which give the issuer a choice of
settling an obligation with a variable number of securities, settling an
obligation with a transfer of assets or any mandatorily redeemable instrument
should be classified as a liability. SFAS No. 150 is effective for all
freestanding financial instruments entered into or modified after May 31, 2003.
Otherwise, the provisions of SFAS No. 150 were effective July 1, 2003. The
adoption of SFAS No. 150 did not have any impact on the Company's consolidated
financial statements.
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FORWARD - LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and Financial
Condition and other sections of this Form 10-Q include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All
statements other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends, certain risks, uncertainties and other factors that
could cause actual results to differ materially from any future results implied
by such forward-looking statements. Factors that might cause such a difference
include, but are not limited to: delays in introducing new products or failure
of consumers to accept new products; actions by competitors, which may result in
mergers, technology improvement or new product introductions; the dependence on
certain national chain drug stores, food stores and mass merchandiser
relationships due to the concentration of sales generated by such chains;
changes in fashion-oriented color cosmetic trends; the effect on sales of lower
retailer inventory targets; the effect on sales of political and/or economic
conditions; the Company's estimates of costs and benefits, cash flow from
operations and capital expenditures; interest rate or foreign exchange rate
changes affecting the Company and its market sensitive financial instruments
including the Company's qualitative and quantitative estimates as to market risk
sensitive instruments; changes in product mix to products which are less
profitable; shipment delays; depletion of inventory and increased production
costs resulting from disruptions of operations at any of our manufacturing or
distribution facilities; foreign currency fluctuations affecting our results of
operations and the value of our foreign assets and liabilities; the relative
prices at which we sell our products and our foreign competitors sell their
products in the same market; our operating and manufacturing costs outside of
the United States; changes in the laws, regulations and policies, including
changes in accounting standards, that effect, or will effect, us in the United
States and/or abroad; and trends in the general economy. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved. Without limitation, use of the following words is
intended to identify forward-looking statements: "may," "will," "should,"
"expect," "anticipate," "look forward to," "estimate," "indications," "intend,"
"plan," "momentum," or "continue" or the negative thereof or other variations
thereon.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or expectation
only as of the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or circumstances that
arise after the date hereof. In addition to the disclosure contained herein,
readers should carefully review any disclosure of risks and uncertainties
contained in other documents the Company files or has filed from time to time
with the Securities and Exchange Commission pursuant to the Exchange Act.
Item 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, the Company evaluated, under
the supervision and with the participation of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rule 13a-15(e) and 15d-15(e)). Based
upon that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective
as of the end of the period covered by this quarterly report.
The Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, has evaluated the Company's internal control over
financial reporting to determine whether any changes occurred during the quarter
covered by this report that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting. Based on
that evaluation, there has been no such change during the quarter covered by
this report.
-19-
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
The Company filed a Form 8-K with the SEC, dated July
30, 2003 to report under Item 9 of that Form that a press
release was issued on July 29, 2003 announcing earnings
for the three and six months ended June 30, 2003. A copy
of the press release was filed as an exhibit to the Form
8-K
The Company filed a Form 8-K with the SEC, dated
October 29, 2003 to report under Item 9 of that Form
that a press release was issued on October 28, 2003
announcing earnings for the three and nine months ended
September 30, 2003. A copy of the press release was
filed as an exhibit to the Form 8-K.
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEL LABORATORIES, INC.
(Registrant)
DATE: NOVEMBER 12, 2003 /S/ DAN K. WASSONG
---------------------------- ------------------
Dan K. Wassong
Chairman, President and
Chief Executive Officer
DATE: NOVEMBER 12, 2003 /S/ ENZO J. VIALARDI
------------------------- --------------------
Enzo J. Vialardi
Executive Vice President and
Chief Financial Officer
-21-