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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 JUNE 30, 2004
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NO. 1-5439
DEL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-1953103
- ----------------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
178 EAB PLAZA, PO BOX 9357,
UNIONDALE, NEW YORK 11553-9357
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 844-2020
-------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES (X) NO ( )
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES (X) NO ( )
The number of shares of Common Stock, $1 par value, outstanding as of
August 4, 2004 was 9,742,140.
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
Part I. FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements:
Consolidated Balance Sheets as of
June 30, 2004 (unaudited) and December 31, 2003 3
Consolidated Statements of Earnings for the three and six
months ended June 30, 2004 and 2003 (unaudited) 4
Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 (unaudited) 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Item 4. Controls and Procedures 23
Part II. OTHER INFORMATION
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of 24
Equity Securities
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
All other schedules and compliance information called for by the instructions
to Form 10-Q have been omitted since the required information is not present
or not present in amounts sufficient to require submission.
-2-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, 2004 AND DECEMBER 31, 2003
(In thousands, except for share and per share data)
June 30 December 31
2004 2003
---------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 2,027 $ 2,113
Accounts receivable, less allowance for doubtful accounts
of $1,659 in 2004 and $4,391 in 2003 78,184 75,130
Inventories 101,970 92,518
Income taxes receivable 3,284 --
Deferred income taxes 8,042 8,042
Prepaid expenses and other current assets 2,597 2,671
--------- ---------
Total current assets 196,104 180,474
Property, plant and equipment, net 46,204 49,274
Intangibles arising from acquistions, net 7,421 7,761
Goodwill 6,282 6,282
Other assets 14,908 13,262
Deferred income taxes 6,159 6,159
--------- ---------
Total assets $ 277,078 $ 263,212
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Note payable to bank $ 5,000 $ --
Current portion of long-term debt 491 8,760
Accounts payable 46,071 43,872
Accrued liabilities 24,673 25,023
Income taxes payable -- 307
--------- ---------
Total current liabilities 76,235 77,962
Long-term pension liability, less current portion 9,767 9,767
Deferred income taxes 5,205 5,205
Deferred liability 1,383 1,334
Long-term debt, less current portion 74,355 63,373
--------- ---------
Total liabilities 166,945 157,641
--------- ---------
Shareholders' equity:
Preferred stock $ .01 par value, authorized
1,000,000 shares; no shares issued -- --
Common stock $1 par value, authorized
20,000,000 shares; issued 10,000,000 shares 10,000 10,000
Additional paid-in capital 8,929 8,823
Accumulated other comprehensive loss (2,823) (2,594)
Retained earnings 99,746 95,309
--------- ---------
115,852 111,538
Less: Treasury stock at cost, 259,756 shares
in 2004 and 289,308 shares in 2003 (5,217) (5,325)
Receivables for stock options exercised (502) (642)
--------- ---------
Total shareholders' equity 110,133 105,571
--------- ---------
Total liabilities and shareholders' equity $ 277,078 $ 263,212
========= =========
The accompanying notes are an integral part of the consolidated financial statements.
-3-
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(In thousands, except for share and per share data)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net sales $ 102,948 $ 97,976 $ 186,013 $ 191,339
Cost of goods sold 52,370 47,170 93,585 92,828
Selling and administrative expenses 43,049 40,155 82,729 79,804
Severance expenses (note 9) 13 1,850 3 1,850
Merger expenses (note 14) 216 -- 216 --
------------ ------------ ------------ ------------
Operating income 7,300 8,801 9,480 16,857
Other income (expense):
Loss on sale of building and land (41) -- (41) --
Interest expense, net (784) (1,009) (1,749) (2,054)
Other income (expense), net (356) 107 (464) 27
------------ ------------ ------------ ------------
Earnings before income taxes 6,119 7,899 7,226 14,830
Income taxes 2,362 2,959 2,789 5,565
------------ ------------ ------------ ------------
Net earnings $ 3,757 $ 4,940 $ 4,437 $ 9,265
============ ============ ============ ============
Earnings per common share:
Basic $ 0.39 $ 0.51 $ 0.46 $ 0.97
============ ============ ============ ============
Diluted $ 0.36 $ 0.49 $ 0.43 $ 0.93
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 9,735,000 9,604,000 9,726,000 9,596,000
============ ============ ============ ============
Diluted 10,361,000 10,056,000 10,372,000 9,992,000
============ ============ ============ ============
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 SIX MONTHS ENDED JUNE 30, 2004 AND 2003
(In thousands)
(UNAUDITED)
June 30
2004 2003
---- ----
Cash flows provided by (used in) operating activities:
Net earnings $ 4,437 $ 9,265
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,179 4,026
Recovery on allowance for doubtful accounts (9) (202)
Tax benefit on stock options exercised 444 1,217
Loss on sale of building and land 41 --
Other non-cash operating items 320 140
Changes in operating assets and liabilities:
Accounts receivable (3,163) (14,190)
Inventories (9,782) (7,506)
Prepaid expenses and other current assets (55) 589
Other assets (1,655) (4,793)
Accounts payable 2,324 7,911
Accrued liabilities (528) 98
Deferred liability 49 --
Income taxes receivable / payable (3,619) 167
-------- --------
Net cash used in operating activities (7,017) (3,278)
-------- --------
Cash flows provided by (used in) investing activities:
Net proceeds from sale of building and land 4,816 235
Property, plant and equipment additions (5,387) (10,083)
-------- --------
Net cash used in investing activities (571) (9,848)
-------- --------
Cash flows provided by (used in) financing activities:
Borrowing under note payable 5,000 --
Principal borrowings under revolving credit agreement, net 3,000 16,000
Principal payments under mortgages (199) (104)
Principal payment under senior notes -- (8,000)
Repayment of mortgage -- (3,865)
Borrowings under mortgage and construction loan -- 10,481
Payment of capital lease obligations (55) (51)
Proceeds from the exercise of stock options 201 53
Acquisition of treasury stock (429) (1,184)
-------- --------
Net cash provided by financing activities 7,518 13,330
-------- --------
Effect of exchange rate changes on cash (16) 10
-------- --------
Net increase (decrease) in cash and cash equivalents (86) 214
Cash and cash equivalents at beginning of year 2,113 501
-------- --------
Cash and cash equivalents at end of period $ 2,027 $ 715
======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 1,766 $ 2,105
Income taxes $ 6,152 $ 4,246
Non-cash transactions:
Shares tendered by optionees to exercise stock options $ 780 $ 5,136
Equipment acquired under capitalized leases $ -- $ 543
The accompanying notes are an integral part of the consolidated financial statements.
-5-
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE DATA)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Del
Laboratories, Inc. and subsidiaries ("the Company") have been prepared
in accordance with U.S. generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by U.S. generally accepted accounting principles for complete
financial statements. Interim results are not necessarily indicative of
results for a full year.
A summary of the Company's critical and significant accounting policies
are presented in its 2003 Form 10-K. Users of financial information
produced for interim periods are encouraged to refer to the footnotes
contained in the Form 10-K when reviewing interim financial results.
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 was subject to
significant interpretation by the FASB, and was revised and reissued in
December 2003 ("FIN No. 46R"). FIN No. 46R states that if an entity has
a controlling financial interest in a variable interest entity, the
assets, the liabilities and results of activities of the variable
interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN No. 46 and FIN No. 46R
are applicable for all entities that are considered special purpose
entities ("SPE") by the end of the first reporting period ending after
December 15, 2003. The provisions of FIN No. 46R are applicable to all
other types of variable interest entities for reporting periods ending
after March 15, 2004. The adoption of FIN No. 46 and FIN No. 46R did not
have a material impact on the Company's consolidated financial
statements.
In the opinion of management, the accompanying interim consolidated
financial statements contain all material adjustments, consisting only
of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows of
the Company for interim periods.
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 Six Months Ended
JUNE 30 JUNE 30
------- -------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings, as reported $ 3,757 $ 4,940 $ 4,437 $ 9,265
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
net of related tax effects $ (513) $ (579) $(1,037) $ (1,148)
------- ------- ------- --------
Pro forma net earnings $ 3,244 $ 4,361 $ 3,400 $ 8,117
======= ======= ======= ========
Earnings per share:
Basic - as reported $ 0.39 $ 0.51 $ 0.46 $ 0.97
======= ======= ======= ========
Basic - pro forma $ 0.33 $ 0.45 $ 0.35 $ 0.85
======= ======= ======= ========
Diluted - as reported $ 0.36 $ 0.49 $ 0.43 $ 0.93
======= ======= ======= ========
Diluted - pro forma $ 0.31 $ 0.43 $ 0.33 $ 0.81
======= ======= ======= ========
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 second quarter of 2003: dividend
yield 0%; expected lives of 5.0 years; risk-free interest rate of 2.43%;
and expected volatility of 33.2%. The weighted-average fair value of
options granted during the second quarter of 2003 was $7.48. The Company
did not issue any new stock options during the second quarter of 2004.
Weighted-average assumptions for the first six months of 2003, were:
dividend yield 0%; expected lives of 5.0 years; risk-free interest rate
of 2.51%; and expected volatility of 33.2%. The weighted-average fair
value of options granted during the first six months of 2003 was $7.36.
The Company did not issue any new stock options during the first six
months of 2004.
During the first quarter of 2004, the Financial Accounting Standards
Board ("FASB") issued an exposure draft, "Share-Based Payment, an
amendment of FASB Statements No. 123 and 95." This exposure draft would
require stock-based compensation to employees to be recognized as a cost
in the financial statements and that such cost be measured according to
the fair value of the stock options. In the absence of an observable
market price for the stock awards, the fair value of the stock options
would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the
option, the expected term of the option, the current price of the
underlying share, the expected volatility of the underlying share price,
the expected dividends on the underlying share and the risk-free
interest rate. The proposed requirements in the exposure draft would be
effective for the first fiscal year beginning after December 15, 2004.
The FASB intends to issue a final Statement during the fourth quarter of
2004. The Company will continue to monitor communications on this
subject from the FASB in order to determine the impact on the Company's
consolidated financial statements.
3. INVENTORIES
Inventories are valued at the lower of cost (principally first-in /
first-out) or market value. The Company records reductions to the cost
of inventories based upon its forecasted plans to sell, historical scrap
and disposal rates and physical condition of the inventories. The
components of inventories were as follows:
June 30 December 31
2004 2003
---- ----
Raw Materials $ 58,107 $40,586
Work in Process 5,201 4,856
Finished Goods 38,662 47,076
-------- -------
$101,970 $92,518
======== =======
-7-
4. INTANGIBLES
Intangibles arising from acquisitions were as follows:
JUNE 30, 2004
GROSS
CARRYING ACCUMULATED NET BOOK
VALUE AMORTIZATION VALUE
----- ------------ -----
Intellectual property rights $10,558 $ 3,270 $ 7,288
Trademarks and other 3,060 2,927 133
------- ------- -------
$13,618 $ 6,197 $ 7,421
======= ======= =======
DECEMBER 31, 2003
GROSS
CARRYING ACCUMULATED NET BOOK
VALUE AMORTIZATION VALUE
----- ------------ -----
Intellectual property rights $10,558 $ 3,006 $ 7,552
Trademarks and other 3,060 2,851 209
------- ------- -------
$13,618 $ 5,857 $ 7,761
======= ======= =======
Amortization expense was $170 and $169 for the three months ended June
30, 2004 and 2003, respectively, and amounted to $340 and $339 for the
six months ended June 30, 2004 and 2003, respectively. The estimated
amortization expense for the fiscal years ending December 31, 2004,
2005, 2006, 2007 and 2008, is $681, $531, $531, $531 and $531,
respectively. The useful lives for intellectual property rights,
trademarks and other are 20 years.
5. NOTE PAYABLE
On April 29, 2004, the Company entered into a $5,000 Line of Credit
agreement with a bank. The line of credit has certain cross default and
merger provisions, expires on October 29, 2004, and does not include
any financial covenants. The line of credit was fully drawn on May 26,
2004 with monthly interest payable at an annual rate of 2.4% and with a
maturity date of September 29, 2004.
6. LONG - TERM DEBT
Long - term debt consisted of the following:
June 30 December 31
2004 2003
---- ----
Senior notes $24,000 $24,000
Notes payable under revolving credit agreement 37,000 34,000
Mortgages on land and buildings 13,462 13,694
Obligations under capital leases 384 439
------- -------
$74,846 $72,133
Less current portion 491 8,760
------- -------
$74,355 $63,373
======= =======
On May 18, 2004, the mortgage covering the property in North Carolina
was amended. The maturity of the mortgage was extended from March 15,
2010 to March 18, 2011 and the interest rate was fixed at 6.39%.
On April 13, 2004, the senior notes were amended and restated. The
maturity of the notes was extended to April 15, 2011 with annual
principal payments of $6,000 required on April 15, 2008, April 15,
2009, April 15, 2010 and April 15, 2011. The interest rate was reduced
from 9.5% to 5.56% payable semi-annually on October 15 and April 15 of
each year. The amended agreement is unsecured and includes covenants
which provide, among other things, for the maintenance of certain
financial ratios.
-8-
On April 13, 2004, the revolving credit agreement was amended and
restated. The amended facility provides credit of $45,000, and extends
the expiration to April 13, 2009. Under the terms of the agreement,
interest rates on borrowings are based on LIBOR or prime rates at the
Company's option. The terms of the agreement include a commitment fee
based on unutilized amounts and an annual agency fee. The deferred
financing fees associated with the April 13, 2004 amendment and
unamortized deferred financing fees associated with the March 2002 and
February 2000 amendments are being amortized over the term of the new
agreement. Covenants provide, among other things, for the maintenance
of certain financial ratios. The agreement is unsecured and no
compensating balances are required.
On April 1, 2004, the lender under the mortgage covering the property
in Barrie, Ontario agreed to extend the maturity of the mortgage from
March 1, 2005 to April 1, 2009 and to reduce the interest rate from
8.38% to 6.37%.
7. EMPLOYEE PENSION PLANS
The Company maintains two non-contributory defined benefit pension
plans covering all U.S. eligible employees. The Del Non-Union Plan
formula is based on years of service and the employee's compensation
during the five years before retirement. The Del LaCross Union Plan
formula is based on years of service. The LaCross Plan covers former
employees of the Company's Newark, New Jersey facility which ceased
operations during 2002. As a result of this closure, more than 20% of
plan participants in the LaCross Plan were terminated, which resulted
in a partial termination of the plan. Due to the partial termination of
the plan, all affected participants became fully vested in their
accrued benefits at their termination date. Assets held by these plans
consist of cash and cash equivalents, fixed income securities
consisting of U.S. government and corporate bonds and common stocks.
The Company also has a defined benefit supplemental executive
retirement plan (SERP) for certain of its executives. The SERP is a
non-qualified plan under the Internal Revenue Code. The assets in the
SERP trust are considered assets of the Company, not plan assets, and
as such, are included in other assets on the accompanying consolidated
balance sheets. The assets of the SERP, which consist of cash and cash
equivalents, are held-to-maturity securities and, as such, are carried
at cost plus accrued interest.
COMPONENTS OF NET PERIOD BENEFIT COST
The components of net periodic benefit costs for the Company's domestic
plans are set forth in the following tables:
Three Months Ended
June 30, 2004
--------------------------------------
DEL NON- DEL LACROSS
UNION PLAN PLAN SERP
---------- ---- ----
Service Cost $ 770 $ -- $ 13
Interest Cost 578 19 106
Expected return on plan assets (516) (18) --
Recognized prior service cost 13 -- 37
Recognized net (gain) loss 191 4 (3)
------- ------- -------
Net periodic cost $ 1,036 $ 5 $ 153
======= ======= =======
-9-
Six Months Ended
June 30, 2004
--------------------------------
DEL NON- DEL LACROSS
UNION PLAN PLAN SERP
---------- ---- ----
Service Cost $ 1,540 $ -- $ 26
Interest Cost 1,156 38 212
Expected return on plan assets (1,032) (36) --
Recognized prior service cost 26 -- 74
Recognized net (gain) loss 382 8 (6)
------- ------- -------
Net periodic cost $ 2,072 $ 10 $ 306
======= ======= =======
Three Months Ended
June 30, 2003
--------------------------------
DEL NON- DEL LACROSS
UNION PLAN PLAN SERP
---------- ---- ----
Service Cost $ 648 $ -- $ 13
Interest Cost 514 21 103
Expected return on plan assets (394) (26) --
Amortization of unrecognized
transition asset -- -- --
Recognized prior service cost 12 -- 69
Recognized net (gain) loss 182 3 (22)
------- ------- -------
Net periodic cost $ 962 $ (2) $ 163
======= ======= =======
Six Months Ended
June 30, 2003
--------------------------------
DEL NON- DEL LACROSS
UNION PLAN PLAN SERP
---------- ---- ----
Service Cost $ 1,296 $ -- $ 26
Interest Cost 1,028 42 206
Expected return on plan assets (788) (52) --
Amortization of unrecognized
transition asset (1) -- --
Recognized prior service cost 25 -- 138
Recognized net (gain) loss 364 6 (44)
------- ------- -------
Net periodic cost $ 1,924 $ (4) $ 326
======= ======= =======
-10-
CONTRIBUTIONS
The Company previously disclosed in its financial statements for the
year ended December 31, 2003, that it expects to contribute in 2004
approximately $5,215 and $808, to its Non-Union Plan and SERP
respectively, and did not anticipate that a contribution would be made
to the LaCross Plan. As of June 30, 2004, $1,948 and $8 of
contributions have been made to the Non-Union Plan and SERP,
respectively, and no contributions have been made to the LaCross Plan.
The Company presently anticipates contributing an additional $2,329 to
fund its Non-Union Plan for a total of $4,277, contributing an
additional $7 to fund its SERP for a total of $15 and making no
additional contributions to the LaCross Plan. The decrease in the
expected contribution to the Non-Union Plan for 2004 is due to a
change, in April 2004, in the minimum funding requirement rules for
2004. The significant decrease in the expected contribution to the SERP
is due to the fact that participants over 65 who were assumed to be
retiring during the first quarter of 2004 did not retire.
8. 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. In connection
with this sale, an option was granted to the buyer for the remaining
8.5 acres of improved land and buildings owned by the Company which was
exercised by the buyer on June 30, 2004. The improved land and
buildings were sold for gross proceeds of $5,000, which was reduced by
$320 for closing costs and increased by $136 for other closing
adjustments, resulting in net proceeds of $4,816. The improved land and
buildings had a book value at June 30, 2004 of $4,513. After closing
costs of $320 and other transaction related expenses of $208, the sale
resulted in a loss of $41 ($25 after-tax).
9. CLOSURE OF FARMINGDALE PLANT
On May 30, 2003, the Company announced the formal plan for the transfer
of its principal manufacturing operations, for both the Cosmetic and
Pharmaceutical segments, to Rocky Point, North Carolina from
Farmingdale, New York. Pursuant to the Company's formal severance
policy for non-union employees and, severance benefits due under the
union contract resulting from the plant closure, a charge of $1,850 for
severance costs and related benefits for approximately 360 union and
non-union employees associated with this move was recorded during the
six months ended June 30, 2003. Additional severance benefits earned by
employees being terminated will be recognized as a charge in the
financial statements as such severance benefits are earned. During the
first quarter of 2004, a provision of $56 was recorded for such earned
severance benefits, net of adjustments of $66 to the initial accrual,
which resulted in a net recovery of $10. During the second quarter of
2004, a provision of $18 was recorded for such earned severance
benefits, net of adjustments of $5 to the initial accrual, which
resulted in a net provision of $13. During 2004 and 2003, $90 and $127,
respectively, of relocation and other move related costs were expensed
as incurred. The Company estimates that a total of approximately $13
(Cosmetic segment - $8.5; Pharmaceutical segment - $4.5), will be
incurred for additional severance, relocation and other move related
costs during the second half of 2004. As of June 30, 2004, 356 union
and non-union employees have been terminated and $1,625 in severance
benefits was paid.
A summary of the activity in the accrual for the plant closure was as
follows:
Balance December 31, 2003 $ 1,714
Provision 74
Payments (1,306)
Adjustments (71)
------
Balance June 30, 2004 $ 411
=======
-11-
10. EARNINGS PER SHARE
Basic earnings per share is computed by dividing income available to
common shareholders (which for the Company equals its recorded net
earnings) by the weighted-average number of common shares outstanding
during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other contracts to issue
common stock, such as stock options, were exercised, converted into
common stock or otherwise resulted in the issuance of common stock.
On November 20, 2003, the Company's Board of Directors approved a 5%
stock dividend. As a result, 462,998 shares of treasury stock were
issued on December 29, 2003 to shareholders of record on December 1,
2003. Accordingly, the weighted-average common shares outstanding in
the consolidated statement of earnings for the three and six months
ended June 30, 2003, have been adjusted to reflect the dividend.
A reconciliation between the numerators and denominators of the basic
and diluted earnings per common share were as follows:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings (numerator) $ 3,757 $ 4,940 $ 4,437 $ 9,265
------- ------- ------- -------
Weighted-average common shares
(denominator for basic earnings per share) 9,735 9,604 9,726 9,596
Effect of dilutive securities:
Employee stock options 626 452 646 396
------- ------- ------- -------
Weighted-average common and potential
common shares outstanding
(denominator for diluted earnings per share) 10,361 10,056 10,372 9,992
======= ======= ======= =======
Basic earnings per share $ 0.39 $ 0.51 $ 0.46 $ 0.97
======= ======= ======= =======
Diluted earnings per share $ 0.36 $ 0.49 $ 0.43 $ 0.93
======= ======= ======= =======
Employee stock options of approximately 505,000 shares for the three
months ended June 30, 2003, and 727,000 shares for the six months
ended June 30, 2003 were not included in the net earnings per share
calculation because their effect would have been anti-dilutive. There
were no anti-dilutive shares for the three and six months ended June
30, 2004.
As a result of stock options exercised during the first half of 2004,
the corresponding tax benefit of $444 was recorded as a reduction to
income taxes payable and as an increase in additional paid-in capital.
11. COMPREHENSIVE INCOME
The components of comprehensive income for the three and six months
ended June 30, 2004 and 2003 were as follows:
Three Months Ended Six Months Ended
June 30 June 30
------- -------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings $ 3,757 $ 4,940 $ 4,437 $ 9,265
Foreign currency translation
gain / (loss) (64) 1,047 (229) 1,836
------- ------- ------- -------
Total comprehensive income $ 3,693 $ 5,987 $ 4,208 $11,101
======= ======= ======= =======
-12-
12. SEGMENT INFORMATION
The Company operates in two segments, Cosmetic and Pharmaceutical, that
have been organized by the products and services they offer. The
Cosmetic segment's principal products are nail care, nail color, color
cosmetics, beauty implements, bleaches and depilatories, personal care
products and other related cosmetic items. The Pharmaceutical segment's
principal products are proprietary oral analgesics, baby care products
and first aid products. The accounting policies of the segments are the
same as those described in the summary of significant accounting
policies. 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 Six Months Ended
June 30 June 30
------- -------
2004 2003 2004 2003
---- ---- ---- ----
Net sales:
Cosmetic $ 82,078 $ 78,576 $ 147,316 $ 154,834
Pharmaceutical 20,870 19,400 38,697 36,505
--------- --------- --------- ---------
Consolidated $ 102,948 $ 97,976 $ 186,013 $ 191,339
========= ========= ========= =========
Operating income:
Cosmetic $ 3,398 $ 5,430 $ 3,740 $ 11,759
Pharmaceutical 3,902 3,371 5,740 5,098
--------- --------- --------- ---------
Consolidated $ 7,300 $ 8,801 $ 9,480 $ 16,857
Other income (expense):
Loss on sale of
building and land $ (41) $ -- $ (41) $ --
Interest expense, net $ (784) $ (1,009) $ (1,749) $ (2,054)
Other income (expense),
net $ (356) $ 107 $ (464) $ 27
--------- --------- --------- ---------
Earnings before income taxes $ 6,119 $ 7,899 $ 7,226 $ 14,830
========= ========= ========= =========
Depreciation and amortization:
Cosmetic $ 2,133 $ 2,112 $ 4,173 $ 3,839
Pharmaceutical 3 99 6 187
--------- --------- --------- ---------
Consolidated $ 2,136 $ 2,211 $ 4,179 $ 4,026
========= ========= ========= =========
For the three months ended June 30, 2004, severance expense of $13 was
included in the operating income of the segments, as follows: Cosmetic
- $8.5 and Pharmaceutical - $4.5. For the six months ended June 30,
2004, severance expense of $3 was included in the operating income of
the segments, as follows: Cosmetic - $2 and Pharmaceutical - $1. For
2003, severance expense of $1,850 was included in the operating income
of the segments, as follows: Cosmetic - $1,203 and Pharmaceutical -
$647.
Operating income for 2003 includes an estimated recovery of $511
related to a 2001 charge for the K-Mart Chapter XI bankruptcy filing.
Of this amount, $431 was attributable to the Cosmetic segment and $80
was attributable to the Pharmaceutical segment.
-13-
13. 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. 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 were also
expected to be settled in the Consent Decree. During the second quarter
of 2003, the United States, the State of New York and Federal District
Court approved the aforementioned Consent Decree.
14. SUBSEQUENT EVENT
On July 2, 2004, the Company announced it signed a definitive merger
agreement to be acquired by DLI Holding Corp. in a cash transaction.
Subsequent to the merger, DLI Holding Corp. will be owned by affiliates
of Kelso & Company along with certain members of the Company's current
management. An affiliate of Church & Dwight Co., Inc. will own
non-voting preferred stock. Under the merger agreement, each outstanding
share of Del Laboratories, Inc. common stock will be converted into the
right to receive $35 per share in cash, without interest. Following the
close of the transaction, which is expected to occur in the fourth
quarter of 2004, Del Laboratories, Inc. will become a wholly owned
subsidiary of DLI Holding Corp. and will cease to be a publicly traded
company. Financing commitments for the acquisition have been received by
Kelso & Company. Consummation of the transaction is subject to
satisfaction of certain conditions, including approval by the Company's
shareholders, receipt of the necessary financing proceeds, and
expiration or termination of the waiting period under the
Hart-Scott-Rodino Act. Merger related expenses of $216 related to legal
and advisory fees were incurred in the second quarter of 2004. In July
2004, the Company incurred a fairness opinion fee in connection with the
transaction in the amount of $1,000 which will be reflected in the third
quarter financial statements.
-14-
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
On July 2, 2004, the Company announced it signed a definitive merger
agreement to be acquired by DLI Holding Corp. in a cash transaction.
Subsequent to the merger, DLI Holding Corp. will be owned by affiliates
of Kelso & Company along with certain members of the Company's current
management. An affiliate of Church & Dwight Co., Inc. will own
non-voting preferred stock. Under the merger agreement, each
outstanding share of Del Laboratories, Inc. common stock will be
converted into the right to receive $35 per share in cash, without
interest. Following the close of the transaction, which is expected to
occur in the fourth quarter of 2004, Del Laboratories, Inc. will become
a wholly owned subsidiary of DLI Holding Corp. and will cease to be a
publicly traded company. Financing commitments for the acquisition have
been received by Kelso & Company. Consummation of the transaction is
subject to satisfaction of certain conditions, including approval by
the Company's shareholders, receipt of the necessary financing
proceeds, and expiration or termination of the waiting period under the
Hart-Scott-Rodino Act. Merger related expenses of $216 thousand related
to legal and advisory fees were incurred in the second quarter of 2004.
In July 2004, the Company incurred a fairness opinion fee in connection
with the transaction in the amount of $1.0 million which will be
reflected in the third quarter financial statements.
Del Laboratories, Inc. is a fully integrated marketing and
manufacturing company operating in two major segments of the packaged
consumer products business: cosmetics and over-the-counter
pharmaceuticals. Each of the Company's marketing divisions is
responsible for branded lines fitting into one of these general
categories and develops its own plans and goals consistent with its
operating environment and the Company's corporate objectives.
The Company owns a portfolio of highly recognized branded products
which are competitively priced. As reported by ACNielsen, many of the
Company's brands have leading market positions in their product
categories. In our cosmetics segment, the Sally Hansen brand is the
number one brand in the mass market nail care category with market
leadership positions in nail color, nail treatment, and bleaches and
depilatories. The Sally Hansen LaCross brand is the leader in nail and
beauty implements providing a line of high quality beauty implements
including nail clippers, files, scissors, tweezers and eyelash curlers.
N.Y.C. New York Color is one of the most successful new cosmetics
brands in the mass market. This highly recognizable brand of value
cosmetics offers a complete collection of high quality products at
opening price points. In our over-the-counter pharmaceutical segment,
the Orajel brand is the leading oral analgesic in the mass market
channels, as reported by Information Resources, Inc. The Orajel family
of products has been developed with unique formulations specifically
targeted at distinct oral pain and baby care indications. Our Dermarest
brand is a complete line of non-prescription products for relief of
psoriasis and eczema and is the market share leader in the
psoriasis/eczema treatment category.
The Company believes it has strong customer relationships with a
diversified group of prominent retailers across multiple distribution
channels including mass merchandisers, drug chains, drug wholesalers
and food retailers and wholesalers. The Company has a strong track
record of developing innovative new products and successful brand
extensions. An in-house research and development department focuses on
product development, clinical and regulatory affairs and quality
control.
-15-
RESULTS OF OPERATIONS
SECOND QUARTER AND SIX MONTHS ENDED JUNE 30, 2004 VERSUS JUNE 30, 2003
Consolidated net sales for the second quarter ended June 30, 2004 were
$102.9 million, an increase of $4.9 million (5.1%) compared to net sales
of $98.0 million for the second quarter of 2003. Consolidated net sales
for the six months ended June 30, 2004 were $186.0 million versus $191.3
million for the first six months ended June 30, 2003, a decrease of $5.3
million or 2.8%. The decrease in sales for the six months ended June 30,
2004 is attributable to production start-up problems in the first quarter
of 2004 in connection with the transfer of the Company's principal
manufacturing operations, for both the cosmetic and pharmaceutical
segments, to Rocky Point, North Carolina from Farmingdale, New York. As
previously reported in the Form 10-Q for the first quarter ended March 31,
2004, the Company estimated that due to production start-up problems, net
sales for the first quarter of 2004 were negatively impacted by
approximately $14.1 million. Although sales for the second quarter
increased by $4.9 million, the Company estimates that approximately $13.8
million of additional orders were not shipped in the second quarter of
2004 due to the continuation into the second quarter of production
start-up problems. The company has made steady improvement in its
production processes and anticipates that it will be back to its
pre-relocation manufacturing efficiency levels before the end of the third
quarter.
The cosmetic segment of the business generated net sales for the second
quarter ended June 30, 2004 of $82.1 million, an increase of approximately
$3.5 million, or 4.5% compared to net sales of $78.6 million in the second
quarter of 2003. Net sales for the six months ended June 30, 2004 were
$147.3 million versus $154.8 million for the six months ended June 30,
2003. The Company estimates that approximately $11.0 million of orders
were not shipped due to the continuation into the second quarter of
production start-up problems. The Company's core cosmetic business remains
strong, and as reported by ACNielsen, the Sally Hansen brand remains the
number one brand in the mass market nail care category with a 26.5% share
of market for the quarter ended June 30, 2004.
The over-the-counter pharmaceutical segment of the business generated net
sales for the second quarter ended June 30, 2004 of $20.9 million, an
increase of $1.5 million, or 7.6% compared to net sales of $19.4 million
in the second quarter of 2003. Net sales for the six months ended June 30,
2004 were $38.7 million versus $36.5 million for the six months ended June
30, 2003. The Company estimates that approximately $2.8 million of orders
were not shipped due to the continuation into the second quarter of
production start-up problems. The over-the-counter pharmaceutical business
continues to grow and as reported by Information Resources, Inc., Orajel,
the core brand of the pharmaceutical segment continues its leadership
position in the oral analgesics category with a 29.5% share of market for
the quarter.
Cost of goods sold for the second quarter ended June 30, 2004 was $52.4
million, or 50.9% of net sales, compared to $47.2 million, or 48.1% of net
sales for the quarter ended June 30, 2003. Cost of goods sold for the six
months ended June 30, 2004 was $93.6 million or 50.3% of net sales
compared to $92.8 million or 48.5% of net sales for the six months ended
June 30, 2003. The unfavorable variance in cost of goods sold as a
percentage of net sales is primarily due to higher production costs as a
result of start-up problems which continued into the second quarter in
connection with the transfer of manufacturing operations from Farmingdale,
New York to Rocky Point, North Carolina.
Selling and administrative expenses were $43.0 million, or 41.8% of net
sales for the quarter ended June 30, 2004 compared to $40.2 million, or
41.0% of net sales for the second quarter of 2003. Selling and
administrative expenses for the six months ended June 30, 2004 were $82.7
million or 44.5% of net sales compared to $79.8 or 41.7% of net sales for
the six months ended June 30, 2003. The increase of selling and
administrative expenses as a percentage of net sales for the second
quarter of 2004 and for the six months ended June 30, 2004 compared to
2003 is primarily due to increased patent and trademark litigation costs
and increased rent expense. Additionally, a recovery of $0.5 million was
recorded in the second quarter of 2003 of a previously recorded charge
related to the K-Mart Chapter XI bankruptcy filing.
-16-
Merger related expenses were $216 thousand in the second quarter primarily
related to legal and advisory fees incurred in connection with the
proposed merger.
Net interest expense for the three months ended June 30, 2004 of $0.8
million was approximately $0.2 million lower than the second quarter of
2003. Interest expense for the six months ended June 30, 2004 was $1.7
million, or $0.3 lower than the $2.0 million for the six months ended June
30, 2003. The decrease in interest expense for the six months of 2004
compared to the six months of 2003 is primarily due to the reduction of
$6.7 million of average outstanding debt related to the 9.5% senior notes
and a reduction in average borrowing rates of approximately 163 basis
points. The decrease was partially offset by an increase in average
outstanding borrowings of $9.5 million under the revolving credit
agreement, an increase of $0.9 million in average outstanding borrowings
under the bank line of credit, and an increase of $5.4 million in average
outstanding borrowings under the mortgage on the North Carolina property.
Income taxes for the six months ended June 30, 2004 are based on the
Company's expected annual effective tax rate of 38.6% for 2004. The
increase from the effective tax rate of 37.5% used for the six months
ended June 30, 2003, is due primarily to an increase in state and local
income taxes resulting from the reduction of available investment tax
credits, an increase in the amount of permanent non-deductible expenses
and the increased effect of such non-deductible expenses on taxable income
for the period.
Net earnings for the three months ended June 30, 2004 were $3.8 million,
or $0.39 per basic share, compared to $4.9 million, or $0.51 per basic
share for the second quarter of 2003. Net earnings for the six months
ended June 30, 2004 were $4.4 million or $0.46 per basic share compared to
$9.3 million or $0.97 per basic share for the six months ended June 30,
2003.The decrease in net earnings for the second quarter of 2004 as
compared to prior year is directly attributable to higher production costs
as a result of start-up problems which continued into the second quarter
in connection with the transfer of the Company's principal manufacturing
operations from Farmingdale, New York to Rocky Point, North Carolina.
-17-
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOW OVERVIEW
Cash and cash equivalents of $2.0 million at June 30, 2004 was
approximately equal to the balance at December 31, 2003. For the six
months ended June 30, 2004, $7.0 million was used in operating activities
and $7.5 million was provided by financing activities. Cash of $5.4
million used for property, plant and equipment additions was partially
offset by net proceeds of $4.8 million received from the sale of land and
buildings.
OPERATING ACTIVITIES
Net cash used in operating activities for the six months ended June 30,
2004 of $7.0 million was primarily due to increases in inventories of $9.8
million, accounts receivable of $3.2 million and other assets of $1.7
million, partially offset by net earnings before depreciation and
amortization of $4.4 million, and an increase in accounts payable of $2.3
million. The increase in inventories and accounts payable is due to the
timing of purchases of raw materials and components to support projected
sales levels and the inability to ship unfulfilled orders as a result of
the start-up production problems. The increase in other assets is
primarily related to increased inventories of displays to support
projected product shipments.
On May 30, 2003, the Company announced the formal plan for the transfer of
its principal manufacturing operations, for both the Cosmetic and
Pharmaceutical segments, to Rocky Point, North Carolina from Farmingdale,
New York. Pursuant to the Company's formal severance policy for non-union
employees and severance benefits due under the union contract resulting
from the plant closure, a charge of $2.0 million for severance costs and
related benefits for approximately 360 union and non-union employees
associated with this move was recorded in 2003. Additional severance
benefits earned by employees being terminated will be recognized as a
charge in the financial statements as such severance benefits are earned.
As of June 30, 2004, 356 union and non-union employees have been
terminated and $1.6 million in severance benefits were paid. It is
anticipated that approximately $313 thousand will be paid during the last
six months of 2004.
INVESTING ACTIVITIES
Net cash used in investing activities of $5.4 million was primarily for
expenditures related to tooling, plates & dies and machinery and
equipment. The Company estimates that capital spending related to tooling,
plates & dies, and machinery and equipment will approximate a total of
$9.0 million for fiscal year 2004. In addition, net proceeds of $4.8
million were received from the sale of buildings and land.
FINANCING ACTIVITIES
Net cash provided by financing activities of $7.5 million was principally
due to borrowings under a new line of credit agreement with a bank and net
borrowings under the revolving credit facility.
On April 13, 2004, the $24.0 million senior notes were amended and
restated. The maturity of the notes was extended to April 15, 2011, the
interest rate was reduced to 5.56% payable semi-annually on October 15 and
April 15 of each year, and principal payments of $6.0 million are due
annually on April 15, 2008 through April 15, 2011. The amended agreement
is unsecured and includes covenants, which provide among other things, for
the maintenance of certain financial ratios.
-18-
On April 13, 2004, the $45.0 million revolving credit agreement with
banks was amended and restated. The amended facility provides credit of
$45.0 million, extends the expiration to April 13, 2009, eliminates all
fixed dollar covenants, and reduces the interest rate pricing to a range
of 75 - 125 basis points over LIBOR depending on certain financial
ratios. The Company has the option to borrow at prime rates or LIBOR.
Covenants provide, among other things, for the maintenance of certain
financial ratios. The agreement is unsecured and no compensating
balances are required.
On April 1, 2004, the lender under the mortgage covering the property in
Barrie, Ontario agreed to extend the maturity of the mortgage from March
1, 2005 to April 1, 2009 and to reduce the interest rate from 8.38% to
6.37%.
On April 29, 2004, the Company entered into a $5,000 Line of Credit
agreement with a bank. The line of credit has certain cross default and
merger provisions, expires on October 29, 2004, and does not include any
financial covenants. The line of credit was fully drawn on May 26, 2004
with monthly interest payable at an annual rate of 2.4% and with a
maturity date of September 29, 2004.
On May 18, 2004, the mortgage covering the property in North Carolina
was amended. The maturity of the mortgage was extended from March 15,
2010 to March 18, 2011 and the interest rate was fixed at 6.39%.
The Company does not use any off-balance sheet financing arrangements.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual obligations as of June 30, 2004,
the Company has included the following table:
PAYMENTS DUE BY PERIOD
----------------------
(In thousands)
LESS 1 - 2 2 - 3 3 - 5 AFTER 5
TOTAL 1 YEAR YEARS YEARS YEARS YEARS
----- ------ ----- ----- ----- -----
Long-term debt $ 37,462 $ 375 $ 400 $ 426 $ 13,845 $ 22,416
Revolving credit agreement 37,000 -- -- -- 37,000 --
Note payable to bank 5,000 5,000 -- -- -- --
Capital leases 384 116 124 133 11 --
Operating leases 32,033 3,770 3,344 2,966 5,552 16,401
-------- -------- -------- -------- -------- --------
Total contractual obligations (a) $111,879 $ 9,261 $ 3,868 $ 3,525 $ 56,408 $ 38,817
======== ======== ======== ======== ======== ========
(a) The Company expects to contribute approximately $4.3 million in
fiscal year 2004 to fund its pension plans. These expected pension
contributions are not included in the above table.
FUTURE CAPITAL REQUIREMENTS
The Company's near-term cash requirements are primarily related to the
funding of operations, capital expenditures and interest obligations on
outstanding debt. The Company believes that cash flows from operating
activities, cash on hand and amounts available from the credit facility
will be sufficient to enable the Company to meet its anticipated cash
requirements for 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 will be sufficient to meet
the Company's cash requirements. Additionally, in the event of a
decrease in demand for its products or reduced sales, such developments,
if significant, would reduce the Company's cash flow from operations and
could adversely affect the Company's ability to achieve certain
financial covenants under the senior note and revolving credit
agreements. If the Company is unable to satisfy such financial
covenants, the Company could be required to adopt one or more
alternatives, such as reducing or delaying certain operating
expenditures and/or delaying capital expenditures.
-19-
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company makes estimates and assumptions in the preparation of its
financial statements in conformity with 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.
REVENUE RECOGNITION
The Company sells its products to chain drug stores, mass volume
retailers, supermarkets, wholesalers and overseas distributors. Sales of
such products are denominated in U.S. dollars and sales in Canada are
denominated in Canadian dollars. The Company's accounts receivable
reflect the granting of credit to these customers. The Company generally
grants credit based upon analysis of the customer's financial position
and previously established buying and selling patterns. The Company does
not bill customers for shipping and handling costs and, accordingly,
classifies such costs as selling and administrative expense. Revenues
are recognized and discounts are recorded when merchandise is shipped.
Net sales are comprised of gross revenues less returns, various
promotional allowances and trade discounts and allowances. The Company
allows customers to return their unsold products when they meet certain
criteria as outlined in the Company's sales policies. The Company
regularly reviews and revises, as deemed necessary, its estimates of
reserves for future sales returns based primarily upon actual return
rates by product and planned product discontinuances. The Company
records estimated reserves for future sales returns as a reduction of
sales, cost of sales and accounts receivable. Returned products which
are recorded as inventories are valued based on estimated realizable
value. The physical condition and marketability of the returned products
are the major factors considered by the Company in estimating realizable
value. Actual returns, as well as estimated realizable values of
returned products, may differ significantly, either favorably or
unfavorably, from estimates if factors such as economic conditions,
customer inventory levels or competitive conditions differ from
expectations.
PROMOTIONAL ALLOWANCES AND CO-OPERATIVE ADVERTISING
The Company has various performance-based arrangements with retailers to
reimburse them for all or a portion of their promotional activities
related to the Company's products. These sales incentives offered
voluntarily by the Company to customers, without charge, that can be
used in or that are exercisable by a customer as a result of a single
exchange transaction, are recorded as a reduction of net sales at the
later of the sale or the offer, and primarily allow customers to take
deductions against amounts owed to the Company for product purchases.
The Company also has co-operative advertising arrangements with retail
customers to reimburse them for all or a portion of their advertising of
the Company's products. The estimated liabilities for these co-operative
advertising arrangements are recorded as advertising expenses as
incurred, or in the period the related revenue is recognized, depending
on the terms of the arrangement, and included in selling and
administrative expenses, since the Company receives an identifiable
benefit from retail customers for an amount equal to or less than the
fair value of such advertising costs. These arrangements primarily allow
retail customers to take deductions against amounts owed to the Company
for product purchases. The Company regularly reviews and revises the
estimated accruals for these promotional allowance and co-operative
advertising programs. Actual costs incurred by the Company may differ
significantly, either favorably or unfavorably, from estimates if
factors such as the level and success of the retailers' programs or
other conditions differ from our expectations.
-20-
ACCOUNTS RECEIVABLE
In estimating the collectibility of our trade receivables, the Company
evaluates specific accounts when it becomes aware of information
indicating that a customer may not be able to meet its financial
obligations due to a deterioration of its financial condition, lower
credit ratings or bankruptcy. The Company also reviews the related aging
of past due receivables in assessing the realization of these
receivables. The allowance for doubtful accounts is determined based on
the best information available to us on specific accounts and is also
developed by using percentages applied to certain receivables.
INVENTORIES
Inventories are stated at the lower of cost or market value. Cost is
principally determined by the first-in, first-out method. The Company
records a reduction to the cost of inventories based upon its forecasted
plans to sell, historical scrap and disposal rates and the physical
condition of the inventories. These reductions are estimates, which
could vary significantly, either favorably or unfavorably, from actual
requirements if future economic conditions, the timing of new product
introductions, customer inventory levels, fashion-oriented color
cosmetic trends or competitive conditions differ from our expectations.
PROPERTY, PLANT AND EQUIPMENT AND OTHER LONG-LIVED ASSETS
Property, plant and equipment is recorded at cost and is depreciated on
a straight-line basis over the estimated useful lives of such assets.
Leasehold improvements are amortized on a straight-line basis over the
lesser of the estimated useful lives or the lease term. Changes in
circumstances, such as technological advances, changes to the Company's
business model or changes in the Company's capital strategy could result
in the actual useful lives differing from the Company's estimates. In
those cases where the Company determines that the useful life of
property, plant and equipment should be shortened, the Company would
depreciate the net book value in excess of the salvage value, over its
revised remaining useful life, thereby increasing depreciation expense.
Factors such as changes in the planned use of equipment, fixtures,
software or planned closing of facilities could result in shortened
useful lives.
Intangible assets with determinable lives and other long-lived assets,
other than goodwill, are reviewed by the Company for impairment whenever
events or changes in circumstances indicate that the carrying amount of
any such asset may not be recoverable. Recoverability of assets to be
held and used is measured by comparison of the carrying amount of an
asset to the future net cash flows expected to be generated by the
asset. If the sum of the undiscounted cash flows (excluding interest) is
less than the carrying value, the Company recognizes an impairment loss,
measured as the amount by which the carrying value exceeds the fair
value of the asset. The estimate of cash flow is based upon, among other
things, certain assumptions about expected future operating performance.
The Company's estimates of undiscounted cash flow may differ from actual
cash flow due to, among other things, technological changes, economic
conditions, changes to its business model or changes in its operating
performance.
Goodwill must be tested annually for impairment at the reporting unit
level. The Company's reporting units are its Cosmetic and Pharmaceutical
segments. If an indication of impairment exists, the Company is required
to determine if such reporting unit's implied fair value is less than
its carrying value in order to determine the amount, if any, of the
impairment loss required to be recorded. The annual testing performed as
of January 1, 2004, indicated that there was no impairment to goodwill.
The remaining useful lives of intangible assets subject to amortization
are evaluated each reporting period to determine whether events and
circumstances warrant a revision to the remaining period of
amortization. If the estimate of an intangible asset's remaining useful
life is changed, the remaining carrying amount of the intangible asset
should be amortized prospectively over that revised remaining useful
life.
-21-
PENSION BENEFITS
The Company sponsors pension and other retirement plans in various forms
covering all eligible employees. Several statistical and other factors
which attempt to anticipate future events are used in calculating the
expense and liability related to the plans. These factors include
assumptions about the discount rate, expected return on plan assets and
rate of future compensation increases as determined by the Company,
within certain guidelines and in conjunction with its actuarial
consultants. In addition, the actuarial valuation incorporates
subjective factors such as withdrawal and mortality rates to estimate
the expense and liability related to these plans. The actuarial
assumptions used by the Company may differ significantly, either
favorably or unfavorably, from actual results due to changing market and
economic conditions, higher or lower withdrawal rates or longer or
shorter life spans of participants.
NEW ACCOUNTING PRONOUNCEMENTS
In January 2003, the FASB issued Interpretation No. 46 "Consolidation of
Variable Interest Entities" ("FIN No. 46"). FIN No. 46 was subject to
significant interpretation by the FASB, and was revised and reissued in
December 2003 ("FIN No. 46R"). FIN No. 46R states that if an entity has
a controlling financial interest in a variable interest entity, the
assets, the liabilities and results of activities of the variable
interest entity should be included in the consolidated financial
statements of the entity. The provisions of FIN No. 46 and FIN No. 46R
are applicable for all entities that are considered special purpose
entities ("SPE") by the end of the first reporting period ending after
December 15, 2003. The provisions of FIN No. 46R are applicable to all
other types of variable interest entities for reporting periods ending
after March 15, 2004. The adoption of FIN No. 46 and FIN No. 46R did not
have a material impact on the Company's consolidated financial
statements.
During the first quarter of 2004, the Financial Accounting Standards
Board ("FASB") issued an exposure draft, "Share-Based Payment, an
amendment of FASB Statements No. 123 and 95." This exposure draft would
require stock-based compensation to employees to be recognized as a cost
in the financial statements and that such cost be measured according to
the fair value of the stock options. In the absence of an observable
market price for the stock awards, the fair value of the stock options
would be based upon a valuation methodology that takes into
consideration various factors, including the exercise price of the
option, the expected term of the option, the current price of the
underlying share, the expected volatility of the underlying share price,
the expected dividends on the underlying share and the risk-free
interest rate. The proposed requirements in the exposure draft would be
effective for the first fiscal year beginning after December 15, 2004.
The FASB intends to issue a final Statement during the fourth quarter of
2004. The Company will continue to monitor communications on this
subject from the FASB in order to determine the impact on the Company's
consolidated financial statements.
-22-
FORWARD - LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and
Financial Condition and other sections of this Form 10-Q include
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange
Act of 1934 (the "Exchange Act"). All statements other than statements
of historical information provided herein are forward-looking statements
and may contain information about financial results, economic
conditions, trends, certain risks, uncertainties and other factors that
could cause actual results to differ materially from any future results
implied by such forward-looking statements. Factors that might cause
such a difference include, but are not limited to: delays in introducing
new products or failure of consumers to accept new products; actions by
competitors, which may result in mergers, technology improvement or new
product introductions; the dependence on certain national chain drug
stores, food stores and mass merchandiser relationships due to the
concentration of sales generated by such chains; changes in
fashion-oriented color cosmetic trends; the effect on sales of lower
retailer inventory targets; the effect on sales of political and/or
economic conditions; the Company's estimates of costs and benefits, cash
flow from operations and capital expenditures; interest rate or foreign
exchange rate changes affecting the Company and its market sensitive
financial instruments including the Company's qualitative and
quantitative estimates as to market risk sensitive instruments; changes
in product mix to products which are less profitable; shipment delays;
depletion of inventory and increased production costs resulting from
disruptions of operations at any of our manufacturing or distribution
facilities; foreign currency fluctuations affecting our results of
operations and the value of our foreign assets and liabilities; the
relative prices at which we sell our products and our foreign
competitors sell their products in the same market; our operating and
manufacturing costs outside of the United States; changes in the laws,
regulations and policies, including changes in accounting standards,
that effect, or will effect, us in the United States and/or abroad;
trends in the general economy; and Del's failure to consummate the
merger with DLI Holding Corp. Although the Company believes that the
expectations reflected in such forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its expectations
will be achieved. Without limitation, use of the following words is
intended to identify forward-looking statements: "may," "will,"
"should," "expect," "anticipate," "look forward to," "estimate,"
"indications," "intend," "plan," "momentum," or "continue" or the
negative thereof or other variations thereon.
Readers are cautioned not to place undue reliance on these
forward-looking statements, which reflect management's analysis,
judgment, belief or expectation only as of the date hereof. The Company
undertakes no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date
hereof. In addition to the disclosure contained herein, readers should
carefully review any disclosure of risks and uncertainties contained in
other documents the Company files or has filed from time to time with
the Securities and Exchange Commission pursuant to the Exchange Act.
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.
-23-
PART II - OTHER INFORMATION
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF
EQUITY SECURITIES
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
(or Units) Purchased
as Part of Publicly
Total Number of Shares Average Price Paid per Announced Programs
Period (or Units) Purchased Share (or Unit)
April 3,749 $33.51 --
May 25,721 $29.70 --
June 373 $30.68 --
-------------- ---------------------- ----------------------
Total 29,843(1) $30.19 (2)
============= ====================== =======================
(1) Represents shares tendered by employees to pay for stock options
exercised and shares withheld from options exercised to satisfy
income tax liabilities on gains resulting from the exercise.
(2) The Company does not have any publicly announced share repurchase
program.
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS
At the Company's annual meeting held on May 25, 2004, the
shareholders re-elected Charles J. Hinkaty to the Board of Directors
in accordance with proxies solicited pursuant to Section 14 of the
Securities Exchange Act of 1934, as amended. In addition, the
shareholders reapproved the Company's 1999 Amended and Restated
Annual Incentive Plan. Votes were cast for each of such items as
follows:
ELECTION OF DIRECTOR VOTES FOR VOTES WITHHELD
-------------------- --------- --------------
Charles J. Hinkaty 9,101,029 64,059
RE-APPROVAL OF THE COMPANY'S 1999 AMENDED AND RESTATED ANNUAL
INCENTIVE PLAN
-----------------------------------------------------------------
FOR AGAINST ABSTAIN
--- ------- -------
6,849,694 477,910 33,592
-24-
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 Certification of Chief Executive Officer
Exhibit 31.2 Certification of Chief Financial Officer
Exhibit 32.1 Certification of Chief Executive Officer
Pursuant to 18 U.S.C. Section 1350
Exhibit 32.2 Certification of Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350
(b) Reports on Form 8-K
The Company filed a Form 8-K with the SEC, dated April 16,
2004 to report under Item 5 of that Form that the Company
amended and restated its unsecured revolving credit
agreement and its senior notes as of April 13, 2004. Copies
of the complete agreements were filed as exhibits to the
Form 8-K.
The Company filed a Form 8-K with the SEC, dated April
30, 2004 to report under Item 12 of that Form that a press
release was issued on April 29, 2004 announcing earnings for
the three months ended March 31, 2004. A copy of the press
release was filed as an exhibit to the Form 8-K.
The Company filed a Form 8-K with the SEC, dated July 2,
2004 to report under Item 5 of that Form that the Company
entered into an Agreement and Plan of Merger with DLI
Holding Corp. and DLI Acquisition Corp., a direct
wholly-owned subsidiary of DLI Holding Corp., as of July 1,
2004. The Company also issued a press release dated July 2,
2004, announcing that it had entered into the Merger
Agreement. Copies of the Agreement and Plan of Merger and
press release were filed as exhibits to the Form 8-K.
The Company filed a Form 8-K with the SEC, dated July 30,
2004 to report under Item 12 of that Form that a press
release was issued on July 29, 2004 announcing earnings for
the three and six months ended June 30, 2004. A copy of the
press release was filed as on exhibit to the Form 8-K.
-25-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEL LABORATORIES, INC.
(Registrant)
DATE: AUGUST 4, 2004 /S/ DAN K. WASSONG
------------------------- ------------------
Dan K. Wassong
Chairman, President and
Chief Executive Officer
DATE: AUGUST 4, 2004 /S/ ENZO J. VIALARDI
---------------------- --------------------
Enzo J. Vialardi
Executive Vice President and
Chief Financial Officer
-26-