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 MARCH 31, 2005
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. 333-124360
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 |_| NO |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES |_| NO |X|
The number of shares of Common Stock, $.01 par value, outstanding as of May 16,
2005 was 4,223,864.
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
Part I. FINANCIAL INFORMATION Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of
March 31, 2005 (Successor), and December 31, 2004 (Predecessor) 3
Consolidated Statements of Operations for the one month ended
January 31, 2005 (Predecessor), two months ended March 31, 2005
(Successor) and three months ended March 31, 2004 (Predecessor) 4
Consolidated Statements of Cash Flows for the one month ended
January 31, 2005 (Predecessor), two months ended March 31, 2005
(Successor) and three months ended March 31, 2004 (Predecessor) 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 25
Item 3. Quantitative and Qualitative Disclosures About Market Risks 38
Item 4. Controls and Procedures 38
Part II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 6. Exhibits and Reports on Form 8-K 40
SIGNATURES 41
2
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2005 AND DECEMBER 31, 2004
(IN THOUSANDS)
SUCCESSOR PREDECESSOR
PERIOD PERIOD
------ ------
March 31 December 31
2005 2004
---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents $ 4,121 $ 3,873
Accounts receivable, less allowance for doubtful accounts
of $0 in 2005 and $1,726 in 2004 79,636 78,977
Inventories 121,159 111,235
Income taxes receivable 14,310 177
Deferred income taxes 25,175 7,224
Prepaid expenses and other current assets 4,344 3,508
---------- ----------
Total current assets 248,745 204,994
Property, plant and equipment, net 50,107 46,769
Intangibles arising from acquistions, net 263,225 7,085
Goodwill 146,220 6,282
Other assets 29,424 13,743
Deferred income taxes 20,213 6,587
---------- ----------
Total assets $ 757,934 $ 285,460
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,174 $ 501
Accounts payable 47,238 50,530
Accrued liabilities 27,411 19,734
---------- ----------
Total current liabilities 76,823 70,765
Long-term pension liability, less current portion 22,143 12,273
Deferred income taxes 146,494 7,836
Deferred liability -- 1,405
8% senior subordinated notes, net of unamortized discount of $1,133 173,867 --
Long-term debt, less current portion 198,867 71,233
---------- ----------
Total liabilities 618,194 163,512
---------- ----------
Shareholders' equity:
Preferred stock $ .01 par value, authorized
1,000,000 shares; no shares issued (Predecessor) -- --
Common stock $1 par value, authorized 20,000,000
shares; issued 10,000,000 shares - (Predecessor) -- 10,000
Common stock $.01 par value, 4,223,864 shares authorized
and issued - (Successor) 42 --
Additional paid-in capital 142,658 9,348
Accumulated other comprehensive income (loss) 262 (2,363)
Retained earnings (deficit) (3,222) 110,918
---------- ----------
139,740 127,903
Less: Treasury stock at cost, 242,553 shares in 2004 -- (5,453)
Receivables for stock options exercised -- (502)
---------- ----------
Total shareholders' equity 139,740 121,948
---------- ----------
Total liabilities and shareholders' equity $ 757,934 $ 285,460
========== ==========
The accompanying notes are an integral part of the
consolidated financial statements.
3
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR PERIOD AND PREDECESSOR PERIOD
(IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
PERIOD PERIOD
---------------- -------------------------------------
February 1, 2005- January 1, 2005- January 1, 2004-
March 31, 2005 January 31, 2005 March 31, 2004
-------------- ---------------- --------------
Net sales $ 70,917 $ 18,206 $ 83,065
Cost of goods sold 38,730 9,718 41,215
Selling and administrative expenses 28,905 11,475 39,680
Severance expenses (note 10) -- -- (10)
Merger expenses (note 1) 3,927 18,974 --
-------- -------- --------
Operating income (loss) (645) (21,961) 2,180
Other income (expense):
Interest expense, net (4,850) (264) (1,023)
Other income (expense), net 170 (232) (50)
-------- -------- --------
Earnings (loss) before income taxes (5,325) (22,457) 1,107
Provision for (benefit) from income taxes (2,103) (24,434) 427
-------- -------- --------
Net earnings (loss) $ (3,222) $ 1,977 $ 680
======== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
4
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SUCCESSOR PERIOD AND PREDECESSOR PERIOD
(IN THOUSANDS)
(UNAUDITED)
SUCCESSOR PREDECESSOR
PERIOD PERIOD
----------------- ----------------------------------------
February 1, 2005- January 1, 2005- January 1, 2004-
March 31, 2005 January 31, 2005 March 31, 2004
-------------- ---------------- --------------
Cash flows provided by (used in) operating activities:
Net earnings (loss) $ (3,222) $ 1,977 $ 680
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 2,152 748 2,043
Amortization of display fixtures 1,489 764 2,068
Amortization of deferred financing fees and original
issue discount 425 20 58
Deferred income taxes (837) (13,030) --
Provision for (recovery from) doubtful accounts -- 26 (31)
Tax benefit on stock options exercised -- 57 170
Other non-cash operating items (552) 219 139
Changes in operating assets and liabilities:
Accounts receivable (6,670) 5,973 3,859
Inventories (307) (6,063) (8,169)
Prepaid expenses and other current assets (459) (379) 22
Other assets (3,292) (1,686) (4,910)
Accounts payable (3,698) 405 (793)
Accrued liabilities (15,970) 21,720 1,082
Deferred liability -- 1,367 29
Pension liability (net) 338 (330) 263
Income taxes receivable / payable (2,510) (11,598) (937)
---------- ---------- ----------
Net cash provided by (used in) operating activities (33,113) 190 (4,427)
---------- ---------- ----------
Cash flows provided by (used in) investing activities:
Property, plant and equipment additions (783) (797) (2,956)
Purchase of Del Laboratories, Inc. (377,233) -- --
---------- ---------- ----------
Net cash used in investing activities (378,016) (797) (2,956)
---------- ---------- ----------
Cash flows provided by (used in) financing activities:
Principal borrowings (payments) under revolving credit
agreement, net -- (800) 6,800
Principal payments under mortgages (15) (23) (9)
Principal repayments under term loan (500) -- --
Repayment of existing debt under merger (69,316) -- --
Issuance of notes 173,845 -- --
Issuance of term loan 200,000 -- --
Payment of financing and other fees (29,305) -- --
Contributed capital 138,200 -- --
Payment of capital lease obligations (29) -- (28)
Proceeds from the exercise of stock options -- 12 73
Acquisition of treasury stock -- (57) (166)
---------- ---------- ----------
Net cash provided by (used in) financing activities 412,880 (868) 6,670
---------- ---------- ----------
Effect of exchange rate changes on cash (7) (21) (7)
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents 1,744 (1,496) (720)
Cash and cash equivalents at beginning of year 2,377 3,873 2,113
---------- ---------- ----------
Cash and cash equivalents at end of period $ 4,121 $ 2,377 $ 1,393
========== ========== ==========
Supplemental disclosures:
Cash paid for:
Interest $ 866 $ 140 $ 557
Income taxes $ 1,152 $ 136 $ 1,386
Non-cash transactions:
Shares tendered by optionees to exercise stock options $ -- $ 269 $ 142
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)
(UNAUDITED)
(1) ORGANIZATION AND OTHER MATTERS
On January 27, 2005, DLI Acquisition Corp ("Sub"), a Delaware corporation and an
affiliate of Kelso & Company ("Kelso"), was merged (the "Merger") with and into
Del Laboratories, Inc., a Delaware corporation ("Del"), pursuant to an Agreement
and Plan of Merger, dated July 1, 2004 (the "Merger Agreement"), by and among
the Sub, Del and DLI Holding Corp., a Delaware corporation ("Holding").
Following the Merger, Del ceased to be a publicly traded company and is now a
wholly-owned subsidiary of DLI Holding II Corp., a Delaware corporation
("Holding II"), which, in turn, is owned by Holding and is an indirect,
wholly-owned subsidiary of DLI Holding LLC, a Delaware limited liability company
affiliated with Kelso ("DLI LLC").
In connection with the Merger, certain investment partnerships affiliated with
Kelso invested approximately $136.0 million in DLI LLC, as a result of which
such entities now own approximately 98.5% of the interests of DLI LLC. Messrs.
Alstodt, Hinkaty and McMenemy, members of Del's senior management prior to and
following the Merger ("Continuing Investors"), invested, in the aggregate,
$60,000 in DLI LLC for approximately 0.1% of the interests in DLI LLC. A third
party investor invested $2,000,000 in DLI LLC for the balance of the interests
in DLI LLC. The foregoing parties entered into a limited liability company
agreement relating to their ownership of interests in DLI LLC.
Pursuant to separate Exchange Agreements, dated January 27, 2005 (the "Exchange
Agreements"), the Continuing Investors elected to exchange, immediately prior to
effective time of the Merger, options to purchase Del common stock for options
to purchase Holding common stock, constituting approximately 6.6% of the fully
diluted share capital of Holding immediately after the merger.
With the merger completed, William McMenemy was named President and Chief
Executive Officer, Charles J. Hinkaty was named Chief Operating Officer, Harvey
Alstodt was named President of Global Business, and Enzo J. Vialardi remains
Executive Vice President and Chief Financial Officer. With the closing of the
transaction, Dan K. Wassong retired as the Company's Chairman, President and
Chief Executive Officer.
Also following the completion of the Merger, affiliates of Kelso have the right
to designate, directly or indirectly, the board of directors of each of DLI LLC,
Holding, Holding II and Del. Del's board of directors is initially comprised of
Messrs. Alstodt, Hinkaty and McMenemy, members of Del's senior management prior
to and following the Merger, and Messrs. Berney and Moore of Kelso.
In anticipation of the Merger, Sub issued in a private placement offering $175.0
million of 8% Senior Subordinated Notes due 2012. Such notes and all related
obligations were assumed by Del upon the consummation of the Merger. The notes
are guaranteed by certain of the existing domestic subsidiaries of Del.
Immediately prior to the Merger, Sub also entered into a credit agreement with
JPMorgan Chase Bank, N.A., as administrative agent, Bear Stearns Corporate
Lending Inc., as syndication agent, Deutsche Bank Securities Inc., as co-agent
and documentation agent, and the lenders party thereto from time to time,
providing for aggregate maximum borrowings of $250.0 million consisting of a
term loan facility in an aggregate principal amount of $200.0 million (all of
which amount was drawn in connection with the Merger,) and a revolving credit
facility, providing for up to $50.0 million of revolving loans outstanding at
any time, which remained undrawn at March 31, 2005. The obligations under the
credit agreement were assumed by Del upon the consummation of the Merger. The
obligations of Del under the credit agreement are guaranteed by Holding II and
certain of the domestic subsidiaries of Del. The senior credit facilities and
the guarantees thereof are secured by a pledge of the capital stock of Del by
Holding II, pledges of certain of the capital stock of the domestic subsidiaries
of Del and the effective pledge of 65% of the capital stock of certain foreign
subsidiaries of Del, and liens on substantially all of the tangible and
intangible assets of Del and guarantors, subject to certain exceptions.
6
Pursuant to the merger, all of the Company's outstanding common stock was
acquired for $35 a share. The aggregate purchase price paid for all of the
Company's outstanding common stock including options exchanged and transaction
costs was approximately $414,000, comprised of $377,200 for the acquisition of
the outstanding shares and options exercised, $4,500 representing the "fair
value" of the options exchanged, $18,500 in severance payments, $950 of
prepayment penalties and $12,850 of transaction related costs. The acquisition,
as described above, has been accounted for in accordance with Financial
Accounting Standards Board Statement of Financial Accounting Standard ("SFAS")
141, "Business Combinations". The following table summarizes the estimated fair
value of the assets acquired and liabilities assumed at the date of acquisition.
Current assets $252,909
Property, plant and equipment 50,509
Intangibles arising from acquisitions 264,100
Goodwill 146,220
Other assets 28,151
Deferred income taxes 20,213
--------
Total assets acquired $762,102
--------
Current liabilities 77,543
Long-term pension liability 22,143
Deferred income taxes 146,494
Long-term debt 373,222
--------
Total liabilities assumed 619,402
--------
Net assets acquired $142,700
========
Current assets include inventories at a fair value of $116,876 which represents
an increase of $3,640 over book value prior to adjustment to fair value. Of the
increase $2,996 is applicable to finished goods and $644 is applicable to work
in process.
Property, plant and equipment at a fair value of $50,509 represents an increase
of $3,769 over the book value prior to adjustment to fair value. Of the increase
$4,752 is applicable to land and buildings and $983 represents a decrease to
machinery and equipment.
Intangible assets of $264,100 includes $159,100 related to trade names of the
Company's various product lines and $105,000 related to customer relationships.
Included in goodwill of $146,220 is a deferred tax liability of $105,746 which
is due principally to the recognition of the intangible asset of $264,100. These
fair values are based upon a study performed by a valuation specialist. The
trade names are an indefinite-lived intangible asset which is not subject to
amortization, but does require impairment evaluation during each annual
reporting period to determine whether events and circumstances continue to
support an indefinite useful life. The customer relationships are being
amortized over a 20 year life.
The valuations are based on information that is available as of the acquisition
date and the expectations and assumptions that have been deemed reasonable by
our management. No assurance can be given, however, that the underlying
assumptions or events associated with such assets will occur as projected. For
these reasons, among others, the actual results may vary from the projected
results.
Due to the continuing analyses relating to the determination of the fair values
of the assets acquired and liabilities assumed in connection with our
acquisition (U.S. GAAP permits up to one year from the acquisition date to
complete such analyses), any changes to the fair value of net assets acquired
based on information as of the acquisition date, will result in an adjustment to
the intangible asset's fair value and a corresponding adjustment to goodwill.
7
The merger transaction was completed on January 27, 2005. Since the actual
results between the period January 28, 2005 and January 31, 2005 were not
material to the Successor Period of the quarter or to the projected annual
results, the Company has utilized January 31, 2005 as the acquisition date.
As a result of the acquisition, the capital structure of and the basis of
accounting under the "purchase" method for the Company differs from those of the
Company prior to the acquisition. Financial data of the Company for all
reporting periods subsequent to January 31, 2005 (Successor Period) reflect the
acquisition under the purchase method of accounting. Therefore, the Company's
Successor Period financial data generally will not be comparable to the
Company's Predecessor financial data. As a result of the acquisition, the
consolidated statement of operations for the Successor Period includes
amortization expense related to debt issuance costs, original issue discount
amortization and management fees that did not exist prior to the acquisition.
Also, as a result of purchase accounting, the fair values of identifiable
intangibles and property, plant and equipment at the date of acquisition became
their new "cost" basis and depreciation and amortization of these assets in the
Successor Period is based upon their newly established cost basis. Further,
inventory includes a valuation adjustment for production profit at the date of
acquisition which is being charged to cost of goods sold as the inventory is
sold in the Successor Period. Additionally, the fair value of our pension assets
and liabilities were adjusted as a result of purchase accounting; therefore
pension expense for the Successor Period is based upon the newly established
fair values. Also the deferred tax balances were adjusted as a result of the
purchase accounting adjustments. Other effects of purchase accounting in the
Successor Period are not considered material.
The following table summarizes fiscal 2005 and fiscal 2004 results as if the
acquisition occurred on January 1, 2004:
Fiscal Year
2005 2004
Net sales $ 89,123 $ 83,065
Loss before income taxes (30,637) (6,078)
Net (loss) (2,972) (3,732)
The unaudited pro forma financial information reflects increased cost of goods
sold, increased interest expense, additional amortization and depreciation
expense, new management fees, lower pension expense and savings due to the
retirement of the former CEO.
2. 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 2004 Annual Report. Users of financial information produced for
interim periods are encouraged to refer to the footnotes contained in the 2004
Annual Report when reviewing interim financial results.
The Company accounts for acquired businesses using the purchase method of
accounting which requires that the assets acquired and liabilities assumed be
recorded at the date of acquisition at their respective fair values. Our
consolidated financial statements and results of operations reflect an acquired
business after the completion of the acquisition and are not restated. The cost
to acquire a business, including transaction costs, is allocated to the
underlying net assets of the acquired business in proportion to their respective
fair values. Any excess of the purchase price over the estimated fair values of
the net assets acquired is recorded as goodwill.
8
In the opinion of management, the accompanying interim consolidated financial
statements contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company for interim periods.
Certain reclassifications were made to prior year amounts in order to conform to
the current year presentation. Amortization of the display fixtures, previously
included in the cash flow statements in other assets as net cash provided by
operating activities has been reclassified as a separate line item, amortization
of display fixtures, in net cash provided by operating activities.
3. CAPITAL STRUCTURE
In connection with the merger, the Company issued 4,223,864 shares with a $.01
par value.
4. 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 would have
been reduced. The following table illustrates the effect on net earnings if the
Company had applied the fair value recognition provisions of SFAS No. 123, to
stock based employee compensation:
SUCCESSOR PREDECESSOR
PERIOD PERIOD
------------ ---------------------------
Feb 1, 2005- Jan 1, 2005- Jan 1, 2004-
Mar 31, 2005 Jan 31, 2005 Mar 31, 2004
------------ ------------ ------------
Net earnings (loss), as reported $ (3,222) $ 1,977 $ 680
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards
net of related tax effects $ -- $ (125) $ (524)
-------- -------- --------
Pro forma net earnings (loss) $ (3,222) $ 1,852 $ 156
======== ======== ========
The Predecessor Company did not issue any new stock options in 2005 or 2004.
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement No. 123 (revised 2004), "Share-Based Payment". Statement 123(R)
requires an entity to recognize the grant-date fair value of stock options and
other equity-based compensation issued to employees in the income statement, but
expresses no preference for a type of valuation model. Statement 123(R) sets
accounting requirements for "share-based" compensation to employees, including
employee stock purchase plans and carries forward prior guidance on accounting
for awards to non-employees. In addition, accounting for employee stock
ownership plans will continue to be accounted for in accordance with Statement
of Position 93-6 and awards to most non-employee directors will be accounted for
as employee awards. Statement 123(R) is effective for public companies as of the
beginning of the first annual reporting period that begins after June 15, 2005
and for annual periods beginning after December 15, 2005 for non-public
entities, however, early adoption is encouraged. We are in the process of
assessing whether the adoption of Statement 123(R) will have an impact on our
consolidated financial statements.
9
5. 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:
SUCCESSOR PREDECESSOR
PERIOD PERIOD
------ ------
March 31 December 31
2005 2004
---- ----
Raw Materials $ 53,503 $ 54,264
Work in Process 5,802 5,739
Finished Goods 61,854 51,232
-------- --------
$121,159 $111,235
======== ========
6. INTANGIBLES
Trade names have an indefinite life and relate to several of the Company's
product lines, including Sally Hansen, LaCross, N.Y.C. New York Color, Cornsilk,
Orajel, Dermarest, Stye, Gentle Naturals and Pronto. These trade names have
indefinite lives and are used in advertising and marketing of the products and
are widely recognized and accepted by consumer's in the Company's respective
markets. Customer relationships are being amortized on a straight-line basis
over 20 years.
Intangibles arising from acquisitions were as follows:
SUCCESSOR PERIOD
MARCH 31, 2005
--------------
Gross Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
Trade names $159,100 $ -- $159,100
Customer relationships 105,000 875 104,125
-------- -------- --------
$264,100 $ 875 $263,225
======== ======== ========
PREDECESSOR PERIOD
DECEMBER 31, 2004
-----------------
Gross Carrying Accumulated Net Book
Value Amortization Value
----- ------------ -----
Intellectual property rights $ 10,558 $ 3,534 $ 7,024
Trademarks and other 3,065 3,004 61
-------- -------- --------
$ 13,623 $ 6,538 $ 7,085
======== ======== ========
Amortization expense was $875, $44 and $170 for the 2005 Successor Period, the
2005 Predecessor Period and the three months ended March 31, 2004. The estimated
amortization expense for the fiscal years ending December 31, 2005, 2006, 2007,
2008 and 2009, is $5,250, for each of the years. The useful lives for
intellectual property rights, trademarks and other were 20 years.
10
7. INCOME TAXES
Income tax benefit for the Successor Period February 1, 2005 to March 31, 2005
of $2.1 million was based on the Company's expected effective tax rate of 39.5%
for the period February 1, 2005 to December 31, 2005.
Income tax benefit for the Predecessor Period January 1, 2005 to January 31,
2005 of $24.4 million, was due to the recording, as an income tax receivable, of
an anticipated federal income tax refund of approximately $11.4 million
attributable to the utilization of a net operating loss carry-back, the
recording of deferred tax assets of approximately $13.3 million attributable to
net operating loss carry-forwards, and the recording of approximately $0.3
million of deferred tax expense related to timing differences.
Income taxes for the Predecessor Period January 1,2004 to March 31, 2004 of $427
thousand was based on the Company's expected annual effective tax rate of 38.6%
for the year 2004.
Deferred tax assets and liabilities are primarily due to amounts recorded in
connection with the merger transaction.
8. LONG - TERM DEBT
Long - term debt consisted of the following:
SUCCESSOR PREDECESSOR
PERIOD PERIOD
March 31 December 31
2005 2004
---- ----
8% senior subordinated notes $173,867 $ --
Term loan 199,500 --
5.56% senior notes -- 24,000
Notes payable under revolving credit agreement -- 34,000
Mortgages on land and buildings 1,243 13,408
Obligations under capital leases 298 326
-------- --------
$374,908 $ 71,734
Less current portion 2,174 501
-------- --------
$372,734 $ 71,233
======== ========
On January 27, 2005, the Company completed a private offering of $175.0 million
of 8% senior subordinated notes (the "notes") due 2012. The notes were issued at
99.34% of par, resulting in net proceeds of $173.8 million before expenses. The
notes are guaranteed by certain of the existing and future domestic subsidiaries
of the Company. The notes and guarantees are unsecured senior subordinated
obligations and rank equally with all future subordinated indebtedness and are
subordinated to the current and future senior indebtedness and other liabilities
of the Company and its subsidiaries. Interest on the notes is payable
semi-annually on February 1 and August 1, commencing on August 1, 2005.
11
The notes are due February 2012 and may be redeemed at the option of the Company
in whole or in part at any time on or after February 1, 2008 at the redemption
prices set forth in the 8% Senior Subordinated Notes indenture, plus accrued and
unpaid interest and liquidated damages, if any, to the date of redemption. The
Company may also redeem up to 35% of the original aggregate principal amount of
the notes prior to February 1, 2008 with the proceeds of one or more public
equity offerings, at a redemption price equal to 108% of the principal amount
thereof, plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date. The Company may also redeem all the notes upon the occurrence
of a Change in Control (as defined therein), prior to February 1, 2008, at a
redemption price equal to 108% of the principal amount thereof, plus accrued and
unpaid interest and liquidated damages, if any, to the redemption date. The
Company is required to offer to repurchase the notes at a price equal to 101% of
the principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, to the repurchase date under some circumstances involved upon
the occurrence of a Change in Control. The Company must also repurchase the
notes at a price equal to par, plus accrued and unpaid interest and liquidated
damages, if any, to the repurchase date, if the Company sells assets under
certain circumstances.
The notes contain covenants that, among other things, limit the issuance of
additional indebtedness, the incurrence of liens, the payment of dividends or
other distributions, the distributions from certain subsidiaries, the issuance
of preferred stock, the sale of assets and subsidiary stock, transactions with
affiliates and consolidations, mergers and transfers of assets. All of these
limitations and prohibitions, however, are subject to a number of important
qualifications, set forth in the indenture.
Concurrently with the offering of the notes, the Company entered into a credit
agreement with JPMorgan Chase Bank N.A., as administrative agent, Bear Stearns
Corporation Lending Inc., as syndication agent, Deutsche Bank Securities Inc.,
as co-agent and documentation agent and the lenders party thereto from time to
time. The agreement provides for maximum borrowings of $250.0 million consisting
of a term loan facility in an aggregate principal amount of $200.0 million and a
revolving credit facility, providing for up to $50.0 million of revolving loans
outstanding at any time (including letters of credit of up to $15.0 million).
The revolving credit facility matures in January 2011 and the term loan facility
matures in July 2011. The term loan facility requires quarterly principal
payments of $500.0 commencing on March 31, 2005 and continues on the last day of
each consecutive June, September, December and March thereafter, with the
balance payable at maturity. The senior credit facilities, subject to certain
exceptions, are subject to mandatory prepayments and reduction in an amount
equal to (i) the net proceeds of certain debt offerings, asset sales and
insurance recovery and condemnation events, (ii) 50% of the net proceeds of
certain equity offerings or contributions by Holding II and (iii) 75% of excess
cash flow, as defined in the credit agreement, for any fiscal year ending on or
after December 31, 2005. The obligations of the Company under the senior credit
facilities are guaranteed by Holding II and certain of the Company's existing
and future domestic subsidiaries. The senior credit facilities and the
guarantees thereof are secured by a pledge of the capital stock of the Company
by Holding II, pledges of certain of the capital stock of the domestic
subsidiaries of the Company and the effective pledge of 65% of the capital stock
of certain of the Company's foreign subsidiaries, and liens on substantially all
of the tangible and intangible assets of the Company and the guarantors, subject
to certain exceptions.
Under the terms of the credit agreement, interest rates on borrowings are based
upon, at the Company's option, LIBOR or prime rates. The terms of the agreement
include a commitment fee based on unutilized amounts and an annual agency fee.
The agreement includes covenants, that among other things, limit or restrict the
Company's and its subsidiaries abilities to dispose of assets, incur additional
indebtedness, incur guarantee obligations, prepay other indebtedness, including
the notes, make dividends, create liens, make equity or debt investments, make
acquisitions, modify the terms of the notes indenture, engage in mergers or make
capital expenditures and engage in certain transactions with affiliates. The
agreement also requires us to enter into interest rate protection agreements to
provide interest rate protection for a minimum of 50% of our consolidated funded
indebtedness for three years. Effective March 21, 2005, we entered into an
interest rate swap to provide the required interest rate protection. The swap
contract was for a notional amount of $12.5 million for a three-year term. There
was no material change in value at March 31, 2005. In addition, the Company is
required to comply with specified financial ratios and tests.
12
Upon completion of the merger on January 27, 2005, the outstanding principal
balance of $24.0 million on the 5.56% senior notes, plus accrued and unpaid
interest, and prepayment penalties of approximately $1.0 million were repaid.
Also upon completion of the merger, the principal balance of $33.2 million under
the Company's prior credit facility with JPMorgan Chase Bank N.A., along with
accrued and unpaid interest and fees of approximately $80.6 were repaid. The
outstanding principal balance of $12.1 million on the mortgage for the Company's
property in North Carolina, together with accrued and unpaid interest, and
prepayment penalties of $383.0 were also repaid, upon completion of the merger.
9. 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 PERIODIC BENEFIT COST
The components of net periodic benefit costs of the Company's domestic plans are
set forth in the following tables:
SUCCESSOR PERIOD
February 1, 2005 - March 31, 2005
------------------------------------------------------------------------
Del Non- Del LaCross
Union Plan Plan SERP
---------- ---- ----
Service Cost $ 600 $ -- $ 5
Interest Cost 428 12 72
Expected return on plan assets (417) (11) --
-------- -------- --------
Net periodic cost $ 611 $ 1 $ 77
======== ======== ========
13
PREDECESSOR PERIOD
January 1, 2005 - January 31, 2005
------------------------------------------------------------------------
Del Non- Del LaCross
Union Plan Plan SERP
---------- ---- ----
Service Cost $ 300 $ -- $ 3
Interest Cost 214 6 36
Expected return on plan assets (207) (6) --
Recognized prior service cost 4 -- 12
Recognized net loss 77 2 7
-------- -------- --------
Net periodic cost $ 388 $ 2 $ 58
======== ======== ========
PREDECESSOR PERIOD
Three Months Ended March 31, 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
======== ======== ========
14
10. 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 $2,033 for severance costs and related benefits for approximately 360 union
and non-union employees associated with this move was recorded during 2003.
Additional severance benefits earned by employees terminated were recognized as
a charge in the financial statements as such severance benefits were earned.
During the first quarter of 2004, a recovery of $10 was recorded for such earned
severance benefits, net of adjustments of $66 to the initial accrual. No
additional severance expenses were incurred during 2005. During 2005 and 2004,
$(3) and $28, respectively, of relocation and other move related costs were
expensed as incurred. As of March 31, 2005, all union and non-union employees
have been terminated and $2,040 in severance benefits were paid.
A summary of the activity in the accrual for the plant closure was as follows:
Balance December 31, 2004 $ 52
Payments (39)
-----
Balance March 31, 2005 $ 13
=====
11. COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income were as follows:
SUCCESSOR PREDECESSOR
PERIOD PERIOD
------------ ---------------------------
Feb 1, 2005- Jan 1, 2005- Jan 1, 2004-
Mar 31, 2005 Jan 31, 2005 Mar 31, 2004
------------ ------------ ------------
Net earnings (loss) $ (3,222) $ 1,977 $ 680
Foreign currency translation gain / (loss) 262 (346) (165)
-------- -------- --------
Total comprehensive income (loss) $ (2,960) $ 1,631 $ 515
======== ======== ========
15
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, 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.
SUCCESSOR PREDECESSOR
PERIOD PERIOD
------------ ---------------------------
Feb 1, 2005- Jan 1, 2005- Jan 1, 2004-
Mar 31, 2005 Jan 31, 2005 Mar 31, 2004
------------ ------------ ------------
Net sales:
Cosmetic $ 55,387 $ 14,756 $ 65,238
Pharmaceutical 15,530 3,450 17,827
-------- -------- --------
Consolidated $ 70,917 $ 18,206 $ 83,065
======== ======== ========
Operating income (loss):
Cosmetic $ (2,812) $(17,714) $ 342
Pharmaceutical 2,167 (4,247) 1,838
-------- -------- --------
Consolidated $ (645) $(21,961) $ 2,180
Other income (expense):
Interest expense, net $ (4,850) $ (264) $ (1,023)
Other income (expense), net 170 $ (232) $ (50)
-------- -------- --------
Earnings (loss) before income taxes $ (5,325) $(22,457) $ 1,107
======== ======== ========
Depreciation and amortization:
Cosmetic $ 1,679 $ 707 $ 2,040
Pharmaceutical 473 41 3
-------- -------- --------
Consolidated $ 2,152 $ 748 $ 2,043
======== ======== ========
Amortization of display fixtures:
Cosmetic $ 1,489 $ 764 $ 2,068
Pharmaceutical -- -- --
-------- -------- --------
Consolidated $ 1,489 $ 764 $ 2,068
======== ======== ========
For the three months ended March 31, 2004, a severance recovery of $(10) was
included in the operating income of the segments, as follows: Cosmetic - $7 and
Pharmaceutical - $3.
16
(13) Condensed Consolidating Financial Information
The Company's obligations related to its senior credit facilities and the 8%
senior subordinated notes are guaranteed jointly and severally by the Company's
direct and indirect present and future domestic restricted subsidiaries (the
"Guarantors"). The following financial information sets forth, on a condensed
consolidating basis, balance sheets, statements of earnings and statements of
cash flows for domestic subsidiaries of the Company that are Guarantors
(collectively,the "Guarantor Subsidiaries") and foreign subsidiaries of the
Company that are not Guarantors (collectively, the "Non-Guarantor
Subsidiaries"). Separate financial statements for the Subsidiary Guarantors of
the Company are not presented because the Company has determined that such
financial statements would not be material to investors. The accounting policies
of the parent company, the Subsidiary Guarantors and the Subsidiary
Non-Guarantors are the same as those described for the Company in the Form S-4
Registration Statement.
CONSOLIDATING BALANCE SHEET
SUCCESSOR PERIOD
March 31, 2005
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,070 $ (1,253) $ 304 $ -- $ 4,121
Accounts receivable 58,081 16,686 4,869 -- 79,636
Inventories 96,564 10,830 13,765 -- 121,159
Income taxes receivable 14,310 -- -- -- 14,310
Deferred income taxes 25,530 (355) -- -- 25,175
Prepaid expenses and other current assets 3,790 489 65 -- 4,344
---------- ---------- ---------- ---------- ----------
Total current assets 203,345 26,397 19,003 -- 248,745
Property, plant and equipment, net 45,574 983 3,550 -- 50,107
Intercompany 100,167 (88,369) (11,798) -- --
Intangibles arising from acquisitions, net 173,118 90,107 -- -- 263,225
Goodwill 110,334 35,886 -- -- 146,220
Other assets 28,635 10 779 -- 29,424
Note receivable 6,430 -- -- (6,430) --
Deferred income taxes 55,866 (35,653) -- -- 20,213
---------- ---------- ---------- ---------- ----------
Total assets $ 723,469 $ 29,361 $ 11,534 $ (6,430) $ 757,934
========== ========== ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 2,122 $ -- $ 52 $ -- $ 2,174
Accounts payable 41,250 3,397 2,591 -- 47,238
Accrued liabilities 23,006 2,847 1,558 -- 27,411
Income taxes payable (21,682) 22,710 (1,028) -- --
---------- ---------- ---------- ---------- ----------
Total current liabilities 44,696 28,954 3,173 -- 76,823
Long-term pension liability, less current portion 22,143 -- -- -- 22,143
Deferred income taxes 146,359 122 13 -- 146,494
Deferred liability -- -- -- -- --
Note payable -- -- 6,430 (6,430) --
8% senior notes 173,867 173,867
Long-term debt, less current portion 197,675 -- 1,192 198,867
---------- ---------- ---------- ---------- ----------
Total liabilities 584,740 29,076 10,808 (6,430) 618,194
---------- ---------- ---------- ---------- ----------
Shareholders' equity:
Common stock $.01 par value, authorized
4,223,864 shares; issued 4,223,864 shares 42 -- -- -- 42
Additional paid-in capital 142,658 -- -- -- 142,658
Accumulated other comprehensive loss (7) -- 269 -- 262
Retained earnings (3,964) 285 457 -- (3,222)
---------- ---------- ---------- ---------- ----------
Total shareholders' equity 138,729 285 726 -- 139,740
---------- ---------- ---------- ---------- ----------
Total liabilities and shareholders' equity $ 723,469 $ 29,361 $ 11,534 $ (6,430) $ 757,934
========== ========== ========== ========== ==========
17
CONSOLIDATING BALANCE SHEET
PREDECESSOR PERIOD
December 31, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents $ 3,607 $ (398) $ 664 $ -- $ 3,873
Accounts receivable, net 58,062 17,016 3,899 -- 78,977
Inventories 87,410 11,805 12,020 -- 111,235
Income taxes receivable 177 -- -- -- 177
Deferred income taxes 7,075 149 -- -- 7,224
Prepaid expenses and other current assets 3,065 325 118 -- 3,508
--------- --------- -------- --------- ---------
Total current assets 159,396 28,897 16,701 -- 204,994
Property, plant and equipment, net 42,094 996 3,679 -- 46,769
Intercompany (103,361) 105,837 (951) (1,525) --
Intangibles arising from acquisitions, net 7,080 5 -- -- 7,085
Goodwill 3,520 2,762 -- -- 6,282
Other assets 13,195 18 530 -- 13,743
Note receivable 6,430 -- -- (6,430) --
Deferred income taxes 6,301 286 -- -- 6,587
--------- --------- -------- --------- ---------
Total assets $ 134,655 $ 138,801 $ 19,959 $ (7,955) $ 285,460
========= ========= ======== ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 450 $ -- $ 51 $ -- $ 501
Accounts payable 46,283 3,000 1,247 -- 50,530
Accrued liabilities 14,192 4,186 1,356 -- 19,734
Income taxes payable (21,865) 22,360 (495) -- --
--------- --------- -------- --------- ---------
Total current liabilities 39,060 29,546 2,159 -- 70,765
Long-term pension liability, less current portion 12,273 -- -- -- 12,273
Deferred income taxes 7,619 204 13 -- 7,836
Deferred liability 1,405 -- -- -- 1,405
Note payable -- -- 6,430 (6,430) --
Long-term debt, less current portion 70,018 -- 1,215 -- 71,233
--------- --------- -------- --------- ---------
Total liabilities 130,375 29,750 9,817 (6,430) 163,512
--------- --------- -------- --------- ---------
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 10,016 1 2 (19) 10,000
Additional paid-in capital 9,348 1,000 5 (1,005) 9,348
Accumulated other comprehensive loss (3,844) (38) 1,519 -- (2,363)
Retained earnings (5,285) 108,088 8,616 (501) 110,918
--------- --------- -------- --------- ---------
10,235 109,051 10,142 (1,525) 127,903
Less: Treasury stock at cost, 242,553 shares
in 2004 (5,453) -- -- -- (5,453)
Receivables for stock options exercised (502) -- -- -- (502)
--------- --------- -------- --------- ---------
Total shareholders' equity 4,280 109,051 10,142 (1,525) 121,948
--------- --------- -------- --------- ---------
Total liabilities and shareholders' equity $ 134,655 $ 138,801 $ 19,959 $ (7,955) $ 285,460
========= ========= ======== ========= =========
18
CONSOLIDATING STATEMENT OF EARNINGS
SUCCESSOR PERIOD
February 1, 2005 - March 31, 2005
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales $ 48,551 $ 15,432 $ 6,934 $ 70,917
Cost of goods sold 30,698 4,468 3,564 38,730
Selling and administrative expenses 16,391 9,530 2,984 28,905
Merger expenses 3,226 701 -- 3,927
-------- -------- -------- -------- --------
Operating income (1,764) 733 386 -- (645)
Other income (expense):
Interest expense, net (4,802) -- (48) (4,850)
Other income (expense), net 8 (2) 164 170
-------- -------- -------- -------- --------
Earnings (loss) before income taxes (6,558) 731 502 -- (5,325)
Provision for income taxes (2,594) 446 45 (2,103)
-------- -------- -------- -------- --------
Net earnings (loss) $ (3,964) $ 285 $ 457 $ -- $ (3,222)
======== ======== ======== ======== ========
19
CONSOLIDATING STATEMENT OF EARNINGS
PREDECESSOR PERIOD
January 1, 2005 - January 31, 2005
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales $ 13,389 $ 3,129 $ 1,688 $ 18,206
Cost of goods sold 7,890 952 876 9,718
Selling and administrative expenses 7,140 3,270 1,065 11,475
Severance expenses -- --
Merger expenses 15,483 3,491 -- 18,974
-------- -------- -------- -------- --------
Operating loss (17,124) (4,584) (253) -- (21,961)
Other income (expense):
Interest expense, net (239) -- (25) (264)
Other income (expense), net (11) -- (221) (232)
-------- -------- -------- -------- --------
Loss before income taxes (17,374) (4,584) (499) -- (22,457)
Benefit from income taxes (24,273) -- (161) (24,434)
-------- -------- -------- -------- --------
Net earnings (loss) $ 6,899 $ (4,584) $ (338) $ -- $ 1,977
======== ======== ======== ======== ========
20
CONSOLIDATING STATEMENT OF EARNINGS
PREDECESSOR PERIOD
Three Months ended March 31, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
------ ------------ ------------ ------------ ------------
Net sales $ 58,406 $ 16,648 $ 8,011 $ 83,065
Cost of goods sold 32,849 4,314 4,052 41,215
Selling and administrative expenses 25,026 11,049 3,605 39,680
Severance expenses (7) (3) -- (10)
-------- -------- -------- -------- --------
Operating income 538 1,288 354 -- 2,180
Other income (expense):
Interest expense, net (1,000) -- (23) (1,023)
Other income (expense), net (54) (7) 11 (50)
-------- -------- -------- -------- --------
Earnings (loss) before income taxes (516) 1,281 342 -- 1,107
Income taxes (130) 415 142 427
-------- -------- -------- -------- --------
Net earnings (loss) $ (386) $ 866 $ 200 $ -- $ 680
======== ======== ======== ======== ========
21
CONSOLIDATING STATEMENT OF CASH FLOWS
SUCCESSOR PERIOD
February 1, 2005 - March 31, 2005
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ----------- ------------
Cash flows from operating activities:
Net earnings (loss) $ (3,964) $ 285 $ 455 $ 2 $ (3,222)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 1,609 473 68 2 2,152
Amortization of display fixtures 1,396 -- 93 1,489
Amortization of deferred financing fees & original
issue discount 425 -- -- 425
Deferred income taxes (837) -- -- (837)
Other non-cash operating items (381) -- (171) (552)
Changes in operating assets and liabilities:
Accounts receivable (2,785) (2,304) (1,581) (6,670)
Inventories (2,292) 2,335 (350) (307)
Prepaid expenses and other current assets (693) 213 21 (459)
Other assets (2,995) 6 (303) (3,292)
Accounts payable (3,086) (754) 142 (3,698)
Accrued liabilities (14,729) (1,426) 185 (15,970)
Deferred liability -- -- -- --
Pension liability (net) 338 -- -- 338
Income taxes receivable / payable (2,437) 350 (421) (2) (2,510)
Intercompany receivables / payables (689) (249) 916 22 --
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (31,120) (1,071) (946) 24 (33,113)
-------- -------- -------- -------- --------
Cash flows provided by (used in) investing activities:
Property, plant and equipment additions (713) (67) (3) -- (783)
Purchase of Del Laboratories, Inc (377,233) -- -- -- (377,233)
-------- -------- -------- -------- --------
Net cash used in investing activities (377,946) (67) (3) -- (378,016)
-------- -------- -------- -------- --------
Cash flows provided by (used in) financing activities:
Principal payments under mortgages -- -- (15) -- (15)
Principal payments under term loan (500) -- -- -- (500)
Repayment of existing debt under merger (69,316) -- -- -- (69,316)
Issuance of notes 173,845 -- -- -- 173,845
Issuance of term loan 200,000 -- -- -- 200,000
Payment of deferred financing fees (29,305) -- -- -- (29,305)
Contributed Capital 138,200 -- -- -- 138,200
Payment of capital lease obligations (29) -- -- -- (29)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 412,895 -- (15) -- 412,880
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash -- -- 17 (24) (7)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 3,829 (1,138) (947) -- 1,744
Cash and cash equivalents at beginning of year 1,241 (115) 1,251 -- 2,377
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year $ 5,070 $ (1,253) $ 304 $ -- $ 4,121
======== ======== ======== ======== ========
22
CONSOLIDATING STATEMENT OF CASH FLOWS
PREDECESSOR PERIOD
January 1, 2005 - January 31, 2005
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ----------- ------------
Cash flows from operating activities:
Net earnings $ 6,899 $ (4,584) $ (338) $ 1,977
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 673 40 35 748
Amortization of display fixtures 723 41 764
Amortization of deferred financing fees 20 20
Deferred income taxes (13,030) (13,030)
Provision for (recovery from) doubtful accounts 25 1 26
Tax benefit on stock options exercised 57 57
Other non-cash operating items (9) 228 219
Changes in operating assets and liabilities:
Accounts receivable 2,740 2,635 598 5,973
Inventories (4,838) (104) (1,121) (6,063)
Prepaid expenses and other current assets (32) (377) 30 (379)
Other assets (1,609) 3 (80) (1,686)
Accounts payable (1,945) 1,150 1,200 405
Accrued liabilities 21,827 (133) 26 21,720
Deferred liability 1,367 1,367
Pension liability (net) (330) (330)
Income taxes receivable / payable (11,344) (254) (11,598)
Intercompany receivables / payables (1,909) 1,665 256 (12) --
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (715) 295 622 (12) 190
-------- -------- -------- -------- --------
Cash flows provided by (used in) investing activities:
Property, plant and equipment additions (781) (12) (4) (797)
-------- -------- -------- -------- --------
Net cash used in investing activities (781) (12) (4) -- (797)
-------- -------- -------- -------- --------
Cash flows provided by (used in) financing activities:
Principal payments under mortgages (25) 2 (23)
Principal payments under revolving credit agreement (800) (800)
Proceeds from the exercise of stock options 12 12
Acquisition of treasury stock (57) (57)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities (870) -- 2 -- (868)
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash -- -- (33) 12 (21)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (2,366) 283 587 -- (1,496)
Cash and cash equivalents at beginning of year 3,607 (398) 664 3,873
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year $ 1,241 $ (115) $ 1,251 $ -- $ 2,377
======== ======== ======== ======== ========
23
CONSOLIDATING STATEMENT OF CASH FLOWS
PREDECESSOR PERIOD
January 1, 2004 - March 31, 2004
Guarantor Non-Guarantor
Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ----------- ------------
Cash flows from operating activities:
Net earnings $ (386) $ 866 $ 200 $ 680
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 1,825 109 108 1 2,043
Amortization of display fixtures 1,953 -- 115 2,068
Amortization of deferred financing fees 58 -- -- 58
Provision for (recovery from) doubtful accounts (17) (14) -- (31)
Tax benefit on stock options exercised 170 -- -- 170
Other non-cash operating items 141 -- (2) 139
Changes in operating assets and liabilities:
Accounts receivable 2,789 1,105 (35) 3,859
Inventories (6,928) (683) (558) (8,169)
Prepaid expenses and other current assets 45 (27) 4 22
Other assets (4,720) 9 (199) (4,910)
Accounts payable (2,033) 767 473 (793)
Accrued liabilities 1,909 (701) (126) 1,082
Deferred liability 29 -- -- 29
Pension liability (net) 263 -- -- 263
Income taxes receivable / payable (1,346) 382 27 (937)
Intercompany receivables / payables 1,258 (1,349) 91 --
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (4,990) 464 98 1 (4,427)
-------- -------- -------- -------- --------
Cash flows provided by (used in) investing activities:
Property, plant and equipment additions (2,851) (82) (23) (2,956)
-------- -------- -------- -------- --------
Net cash used in investing activities (2,851) (82) (23) -- (2,956)
-------- -------- -------- -------- --------
Cash flows provided by (used in) financing activities:
Principal borrowings under revolving credit
agreement, net 6,800 -- -- 6,800
Principal payments under mortgages -- -- (9) (9)
Payment of capital lease obligations (28) -- -- (28)
Proceeds from the exercise of stock options 73 -- -- 73
Acquisition of treasury stock (166) -- -- (166)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities 6,679 -- (9) -- 6,670
-------- -------- -------- -------- --------
Effect of exchange rate changes on cash -- -- (6) (1) (7)
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents (1,162) 382 60 -- (720)
Cash and cash equivalents at beginning of year 1,750 (254) 617 2,113
-------- -------- -------- -------- --------
Cash and cash equivalents at end of year $ 588 $ 128 $ 677 $ -- $ 1,393
======== ======== ======== ======== ========
24
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Del Laboratories, Inc. is a fully integrated manufacturing and marketing company
operating in two major segments of the packaged consumer products business:
cosmetics and OTC pharmaceuticals. Each of our marketing divisions is
responsible for branded lines fitting into one of these two general categories
and develops its own plans and goals consistent with its operating environment
and our corporate objectives.
The Company owns a portfolio of highly recognized branded products, which are
easy to use, competitively priced and trusted by consumers and retailers. As
reported by ACNielsen Corporation ("ACNielsen") or Information Resources, Inc.
("IRI"), many of our brands have leading market positions in their product
categories. In our cosmetics segment, the Sally Hansen(R) brand is the number
one brand in the mass market nail care category with market leadership positions
in nail enamel, nail treatment and bleaches and depilatories. The La Cross(R)
brand is a 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(R), which management believes to be one
of the most successful new cosmetics brands in the mass market, was launched in
1999. This highly recognizable brand of value cosmetics offers a complete
collection of high quality products at opening price points. In our OTC
pharmaceutical segment, we believe Orajel(R) is the number one oral analgesic in
the United States (based on market share), and the number one pharmacist
recommended brand in the teething segment. The Orajel(R) family of products has
been developed with formulations specifically targeted at distinct oral pain and
infant care indications. Our Dermarest(R) brand is the most complete line of
non-prescription products for relief of psoriasis and eczema and is the market
share leader in the psoriasis/eczema treatment category.
We believe that we have outstanding 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. Our in-house research and development
departments focus on product development, clinical and regulatory affairs and
quality control
MERGER TRANSACTION
On January 27, 2005, DLI Acquisition Corp ("Sub"), a Delaware corporation and an
affiliate of Kelso & Company ("Kelso"), was merged (the "Merger") with and into
Del Laboratories, Inc. a Delaware corporation ("Del"), pursuant to an Agreement
and Plan of Merger, dated as of July 1, 2004 (the "Merger Agreement"), by and
among the Sub, Del and DLI Holding Corp., a Delaware corporation ("Holding").
Under the terms of the Agreement and Plan of Merger dated July 1, 2004, each
outstanding share of Del Labs common stock and each outstanding stock option was
converted into the right to receive $35 per share in cash. The total transaction
was valued at approximately $483 million, including the repayment of
indebtedness of approximately $69 million. Following the Merger, Del ceased to
be a publicly traded company and is now a wholly-owned subsidiary of DLI Holding
II Corp., a Delaware corporation ("Holding II"), which, in turn, is owned by
Holding and is an indirect, wholly-owned subsidiary of DLI Holding LLC, a
Delaware limited liability company affiliated with Kelso ("DLI LLC").
In connection with the Merger, certain investment partnerships affiliated with
Kelso invested approximately $136.0 million in DLI LLC, as a result of which
such entities now own approximately 98.5% of the interests of DLI LLC. Messrs.
Alstodt, Hinkaty and McMenemy, members of Del's senior management prior to and
following the Merger ("Continuing Investors") invested, in the aggregate,
$60,000 in DLI LLC for approximately 0.1% of the interests in DLI LLC. Magnetite
Asset Investors III L.L.C. ("Magnetite") invested $2,000,000 in DLI LLC for the
balance of the interests in DLI LLC. The foregoing parties entered into a
limited liability company agreement relating to their ownership of interests in
DLI LLC.
Pursuant to separate Exchange Agreements, dated January 27, 2005 (the "Exchange
Agreements"), the Continuing Investors elected to exchange, immediately prior to
the effective time of the Merger, options to purchase Del common stock for
options to purchase Holding common stock, constituting approximately 6.6% of the
fully diluted share capital of Holding immediately after the Merger.
25
With the merger completed, William McMenemy was named President and Chief
Executive Officer, Charles J. Hinkaty was named Chief Operating Officer, Harvey
Alstodt was named President of Global Business, and Enzo J. Vialardi remains
Executive Vice President and Chief Financial Officer. With the closing of the
transaction, Dan K. Wassong retired as the Company's Chairman, President and
Chief Executive Officer.
Also following the completion of the Merger, affiliates of Kelso have the right
to designate, directly or indirectly, the board of directors of each of DLI LLC,
Holding, Holding II and Del. Del's board of directors is initially comprised of
Messrs. Alstodt, Hinkaty and McMenemy, members of Del's senior management prior
to and following the Merger, and Messrs. Berney and Moore of Kelso.
In anticipation of the Merger, Sub issued in a private placement offering $175.0
million of 8% Senior Subordinated Notes due 2012. The notes were issued at
99.34% which provided the Company with proceeds of $173.8 million. The notes and
all related obligations were assumed by Del upon the consummation of the Merger.
The notes are guaranteed by certain of the existing domestic subsidiaries of
Del.
Immediately prior to the Merger, Sub also entered into a credit agreement with
JPMorgan Chase Bank, N.A., as administrative agent, Bear Stearns Corporate
Lending Inc., as syndication agent, Deutsche Bank Securities Inc., as co-agent
and documentation agent, and the lenders party thereto from time to time,
providing for aggregate maximum borrowings of $250.0 million consisting of a
term loan facility in an aggregate principal amount of $200.0 million (all of
which amount was drawn in connection with the Merger,) and a revolving credit
facility, providing for up to $50.0 million of revolving loans outstanding at
any time, which remained undrawn at the closing of the Merger. The obligations
under the credit agreement were assumed by Del upon the consummation of the
Merger. The obligations of Del under the credit agreement are guaranteed by
Holding II and certain of the domestic subsidiaries of Del. The senior credit
facilities and the guarantees thereof are secured by a pledge of the capital
stock of Del by Holding II, pledges of certain of the capital stock of the
domestic subsidiaries of Del and the effective pledge of 65% of the capital
stock of certain foreign subsidiaries of Del, and liens on substantially all of
the tangible and intangible assets of Del and guarantors, subject to certain
exceptions.
ACCOUNTING FOR THE TRANSACTION
The merger transaction was completed on January 27, 2005. Since the actual
results between the period January 28, 2005 and January 31, 2005 were not
material to the Successor period of the quarter or to the projected annual
results, the Company has utilized January 31, 2005 as the acquisition date. The
merger transaction was accounted for in accordance with SFAS No. 141, "Business
Combinations." As a result of the merger, our capital structure and our basis of
accounting differ from those prior to the merger transaction. Our financial data
in respect of all reporting periods subsequent to January 31, 2005 reflect the
merger under the purchase method of accounting. Therefore, our financial data
for the period before the merger (which we refer to as the Predecessor Period)
generally will not be comparable to our financial data for the period after the
merger (which we refer to as the Successor Period). As a result of the merger,
our consolidated statement of operations for the Successor Period includes
amortization expense related to debt issuance costs and management fees that did
not exist prior to the acquisition. Further, as a result of purchase accounting,
the fair values of our inventories, intangible assets, and fixed assets on the
date of the merger became their new "cost" basis. Accordingly, the cost of
inventories and the amortization of intangible assets and the depreciation of
fixed assets used for the Successor Period are based upon their newly
established cost basis. Additionally, the fair value of our pension assets and
liabilities were adjusted as a result of purchase accounting; therefore pension
expense for the Successor Period is based upon the newly established fair
values. Other effects of purchase accounting in the Successor Period are not
considered significant.
26
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement establishes financial accounting
and reporting standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years. It requires an
asset and liability approach for financial accounting and reporting of income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The realization of tax benefits of deductible temporary differences and
operating loss or tax credit carry-forwards will depend on whether the Company
will have sufficient taxable income of an appropriate character within the
carry-back and carry-forward period permitted by the tax law to allow for
utilization of the deductible amounts and carry-forwards. Without sufficient
taxable income to offset the deductible amounts and carry-forwards, the related
tax benefits would expire unused. A valuation allowance is recorded when
management determines that it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies, among other factors, in making this assessment. In
the event the Company were to determine that it would not be able to realize
some portion or all of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to earnings in the period such
determination was made. There was no valuation allowance as of the Successor
Period March 31, 2005, the Predecessor Period January 31, 2005, or the
Predecessor Period December 31, 2004 as the Company believes it is more likely
than not that the deferred tax assets will be realized.
27
RESULTS OF OPERATIONS
As discussed above in "Accounting for the Transaction", our financial data in
respect of all reporting periods subsequent to January 31, 2005 reflect the
purchase method of accounting. Our financial data for the Predecessor Period
generally will not be comparable to our financial data for the Successor Period.
The following table sets forth our results of operations for the Successor
Period February 1, 2005 to March 31, 2005, the Predecessor Period January 1,
2005 to January 31, 2005 and the Predecessor Period January 1, 2004 to March 31,
2004. The table also sets forth the Combined Successor Period and Predecessor
Period net sales for the three months ended March 31, 2005.
THREE MONTHS
THREE MONTHS ENDED ENDED
MARCH 31, 2005 MAR 31, 2004
------------------------------------------------- ------------
($000) ($000)
Feb 1,2005 Jan 1, 2005 Jan 1, 2004
Mar 31, 2005 Jan 31, 2005 Mar 31, 2004
------------ ------------ ------------
SUCCESSOR PREDECESSOR PREDECESSOR
PERIOD PERIOD COMBINED PERIOD
------ ------ -------- ------
Net Sales
Cosmetic segment $ 55,387 $ 14,756 $ 70,143 $ 65,238
Pharmaceutical segment 15,530 3,450 18,980 17,827
-------- -------- -------- --------
Total net sales 70,917 18,206 89,123 83,065
Cost of goods sold 38,730 9,718 41,215
Selling and administrative expenses 28,905 11,475 39,680
Severance expenses -- -- (10)
Merger expenses 3,927 18,974 --
-------- -------- --------
Operating income (loss) (645) (21,961) 2,180
Other income (expense):
Interest expense, net (4,850) (264) (1,023)
Other income (expense), net 170 (232) (50)
-------- -------- --------
Earnings (Loss) before income taxes (5,325) (22,457) 1,107
Income taxes (benefit) (2,103) (24,434) 427
-------- -------- --------
Net earnings (Loss) (3,222) 1,977 $ 680
======== ======== ========
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THREE MONTHS ENDED MARCH 31, 2004
The Company's net sales for the three months ended March 31, 2005 were $89.1
million, an increase of $6.1 million, or 7.3% compared to net sales of $83.1
million for the three months ended March 31, 2004.
The Cosmetic segment of the business generated net sales for the three months
ended March 31, 2005 of $70.1 million, an increase of $4.9 million, or 7.5%
compared to net sales of $65.2 million for the three months ended March 31,
2004. As reported by ACNielsen, the Sally Hansen brand remains the number one
brand in the mass market nail care category with a 26.6% share of market for the
quarter. In nail color, the Sally Hansen brand increased its number one market
share position with a 34.2% share of market. Sally Hansen also increased its
number one market share position in nail treatment with a 55.4% share of market
for the quarter. In bleaches and depilatories, the Sally Hansen brand increased
its number one market share position to 37.5% for the quarter, as reported by
ACNielsen.
28
The over-the-counter Pharmaceutical segment of the business generated net sales
for the three months ended March 31, 2005 of $19.0 million, an increase of $1.2
million, or 6.5% compared to net sales of $17.8 million for the three months
ended March 31, 2004. Orajel, the core brand of the Pharmaceutical segment
increased its leadership position in the oral analgesics category with a 27.9%
share of market for the first quarter, as reported by Information Resources,
Inc. In addition, the Dermarest brand increased its leadership position in the
over-the-counter psoriasis/eczema treatment category with a 33.9% share of
market for the quarter, as reported by Information Resources, Inc.
Cost of goods sold for the Successor Period February 1, 2005 to March 31, 2005
was $38.7 million, or 55.0% of net sales. Cost of goods sold for the period
includes approximately $1.0 million, or 1.5% of net sales related to the
increase in inventories to fair value as a result of purchase accounting.
Cost of goods sold for the Predecessor Period January 1, 2005 to January 31,
2005 was $9.7 million, or 53.4% of net sales.
Cost of goods sold for the Predecessor Period January 1, 2004 to March 31, 2004
was $41.2 million, or 49.6% of net sales.
Selling and administrative expenses for the Successor Period February 1, 2005 to
March 31, 2005 was $28.9 million, or 40.8% of net sales.
Selling and administrative expenses for the Predecessor Period January 1, 2005
to January 31, 2005 was $11.5 million, or 63.0% of net sales. Whereas selling
and administrative expenses remain fairly constant on a monthly basis, net sales
for the monthly period January 1, 2005 to January 31, 2005 represent
approximately 20% of sales for the combined period.
Selling and administrative expenses for the Predecessor Period January 1, 2004
to March 31, 2004 were $39.7 million, or 47.8 % of net sales.
Merger expenses for the Successor Period February 1, 2005 to March 31, 2005 of
$3.9 million are primarily related to change of control payments and legal and
advisory fees and expenses incurred in connection with the merger transaction.
Merger expenses for the Predecessor Period January 1, 2005 to January 31, 2005
of $19.0 million, are primarily related to the payment of $18.5 million issued
upon closing of the transaction on January 27, 2005 in connection with the
separation agreement with the former Chairman, and approximately $0.5 million of
legal and advisory fees and expenses incurred in connection with the merger
transaction.
Net interest expense for the Successor Period February 1, 2005 to March 31, 2005
of $4.8 million is primarily attributable to interest incurred on $200.0 million
of Senior Notes and $175.0 million of 8% Senior Subordinated Notes issued on
January 27, 2005 in connection with the merger transaction.
Net interest expense for the Predecessor Period January 1, 2005 to January 31,
2005 of $264 thousand, was attributable to debt existing prior to the merger
transaction.
Net interest expense for the Predecessor Period January 1, 2004 to March 31,
2004 of $1.0 million is primarily related to outstanding borrowings for the
period under the 9.5% senior notes, the revolving credit facility and
outstanding mortgages on the North Carolina property and the Barrie, Ontario
facility.
29
Income tax benefit for the Successor Period February 1, 2005 to March 31, 2005
of $2.1 million was based on the Company's expected effective tax rate of 39.5%
for the period February 1, 2005 to December 31, 2005.
Income tax benefit for the Predecessor Period January 1, 2005 to January 31,
2005 of $24.4 million was due to the recording of an anticipated federal income
tax refund of approximately $11.4 million attributable to the utilization of a
net operating loss carry-back, the recording of deferred tax assets of
approximately $13.3 million attributable to net operating loss carry-forwards,
and the recording of approximately $0.3 million of deferred tax expense related
to timing differences.
Income taxes for the Predecessor Period January 1, 2004 to March 31, 2004 of
$427 thousand was based on the Company's expected annual effective tax rate of
38.6% for the year 2004.
Net loss for the Successor Period February 1, 2005 to March 31, 2005 of $3.2
million is primarily attributable to interest expense of $4.8 million and the
operating loss of $0.6 million, partially offset by the income tax benefit of
$2.1 million.
Net earnings for the Predecessor Period January 1, 2005 to January 31, 2005 of
$2.0 million are attributable to the recording of the income tax benefit of
$24.4 million discussed above, which offset the $22.4 million loss before taxes.
The Company believes that general inflation has had no significant impact on
earnings from operations during the last three years.
LIQUIDITY AND CAPITAL RESOURCES
Our liquidity needs arise primarily from debt service on our substantial
indebtedness and from funding of our capital expenditures, ongoing operating
costs and working capital. In connection with the Merger transaction,
substantially all of our then outstanding indebtedness was redeemed, repurchased
or otherwise repaid and replaced with borrowings under our senior credit
facilities and indebtedness under the notes.
The following financing transactions were entered into in connection with the
Merger:
o the closing of new senior credit facilities which provide for aggregate
maximum borrowings of $250.0 million consisting of $200.0 million in a
term loan and up to $50.0 million in borrowings under a revolving credit
facility;
o the issuance and sale of $175 million in aggregate principal amount 8%
senior subordinated notes due 2012;
o the redemption of all of our outstanding 5.56% senior notes due April 15,
2011, including payment of accrued interest and a related prepayment
premium;
o the repayment of all outstanding principal and accrued interest under our
prior credit facilities and termination of all commitments thereunder; and
o the repayment of the mortgage on our North Carolina facility including
payment of accrued interest and a related prepayment premium.
We intend to fund our ongoing obligations from cash flow from operations and
borrowings under our senior credit facilities. As of March 31, 2005, we had
$374.9 million of total debt, consisting primarily of $175.0 million aggregate
principal amount of notes and $200.0 million of senior debt outstanding under
the term loan. As of March 31, 2005, we had approximately $50.0 million
available to borrow under the revolving credit facility, subject to limitations
under the senior credit facilities.
30
Principal and interest payments under the senior credit facilities, together
with principal and interest payments on the notes, represent significant
liquidity requirements for us. The term loan matures in July 2011 and amortizes
in quarterly installments equal to 0.25% of the original principal amount of the
term loan, with the balance payable at maturity. The revolving credit facility
matures in January 2011.
The loans under the new credit facilities bear interest at variable rates based
upon the interest rate option elected by us. Based on management estimates, the
loans under the term loan facility will bear interest in 2005 at a weighted
average rate per annum of 5.63%. The senior subordinated notes bear interest at
a rate of 8.0%. There were no borrowings under the revolving credit facility.
Based on the prevailing interest rates at February 1, 2005, interest expense in
2005 is expected to be approximately $26.5, including approximately $2.1 million
of non-cash amortization of deferred debt issuance costs. Cash paid for interest
during the Successor Period was $0.9 million.
Borrowings under our senior credit facilities are subject to certain conditions
and limitations described below. The indenture governing the notes offered
hereby, and our senior credit facilities, contain significant financial and
operating covenants, including prohibitions on our ability to incur certain
additional indebtedness or to pay dividends, and restrictions on our ability to
make capital expenditures. Our senior credit facilities also require that we
maintain certain financial ratios and also contain borrowing conditions and
customary events of default, including nonpayment of principal or interest,
violation of covenants, inaccuracy of representations and warranties,
cross-defaults to other indebtedness, bankruptcy and other insolvency events.
We expect that our total capital expenditures will be approximately $12.0
million in 2005, which will be used primarily for machinery and equipment.
We expect that cash provided from operations and available borrowings under our
senior credit facilities will provide sufficient working capital to operate our
business, to make expected capital expenditures and to meet foreseeable
liquidity requirements, including debt service on the notes. We cannot assure
you, however, that our business will, in fact, generate sufficient cash flows or
that future borrowings will, in fact, be available in an amount sufficient to
enable us to service our debt, including the notes, or to fund our other
liquidity needs.
CREDIT AGREEMENT FINANCIAL COVENANTS
Our senior credit facilities contain a number of covenants that, among other
things, limit or restrict the ability of the borrower and its subsidiaries to
dispose of assets, incur additional indebtedness, incur guarantee obligations,
prepay other indebtedness, including the notes, make dividends, create liens,
make equity or debt investments, make acquisitions, modify the terms of the
indenture under which the notes are issued, engage in mergers or make capital
expenditures, or engage in certain transactions with affiliates. In addition,
under our senior credit facilities, the borrower is required to comply with
specified financial covenants, including a maximum leverage ratio of specified
debt to Consolidated EBITDA and a minimum coverage ratio of Consolidated EBITDA
to specified interest expense.
Borrowings under the senior credit facilities are a key source of our liquidity.
Our ability to borrow under the senior credit facilities is dependent on, among
other things, our compliance with the financial covenants contained therein.
Failure to comply with these tests would result in a violation of the credit
agreement for the senior credit facilities and, absent a waiver or an amendment
from the lenders under such agreement, permit the acceleration of all
outstanding borrowings under such credit agreement.
31
The test periods for compliance with the financial covenants in the credit
agreement for our senior credit facilities will begin on June 30, 2005. The
financial covenants specify, among other things, the following requirements for
each fiscal quarter ended during the following test periods:
CONSOLIDATED EBITDA
CONSOLIDATED TOTAL TO CONSOLIDATED
DEBT TO CONSOLIDATED INTEREST COVERAGE
EBITDA LEVERAGE EXPENSE RATIO NOT
TEST PERIOD RATIO NOT MORE THAN LESS THAN
----------- ------------------- ---------
June 30, 2005 6.00 to 1.00 2.00 to 1.00
September 30, 2005 - September 30, 2006 5.75 to 1.00 2.00 to 1.00
December 31, 2006- September 30, 2007 4.75 to 1.00 2.50 to 1.00
December 31, 2007 - September 30, 2008 4.50 to 1.00 2.75 to 1.00
December 31, 2008 - September 30, 2009 4.00 to 1.00 3.00 to 1.00
December 31, 2009 - June 30, 2011 3.50 to 1.00 3.00 to 1.00
"Consolidated EBITDA," as that term is defined under our senior credit
facilities and used for purposes of the financial covenants, consists of our
consolidated net income, adjusted to exclude income tax expense, interest
expense, and depreciation and amortization, as well as certain other items and
expenses, including amortization of intangibles, extraordinary, unusual or
non-recurring gains or losses, certain non-cash charges or expenses deducted in
determining net income, certain cash restructuring charges, loss or gain
associated with the sale or write down of assets not in the ordinary course of
business, the amount of any net minority expense, and certain losses relating to
the disposition of excess or surplus inventory. In addition, for the relevant
periods prior to the closing of the transactions, the determination of
Consolidated EBITDA gives effect to supplemental adjustments for our expected
cost savings. The senior credit facilities further provide that Consolidated
EBITDA is deemed to be $10.7 million, $16.5 million, $22.3 million and $22.1
million, respectively, for the fiscal quarters ended March 31, 2004, June 30,
2004, September 30, 2004 and December 31, 2004 and that, for the fiscal quarter
ending March 31, 2005, Consolidated EBITDA will be increased by $1.6 million as
an allowance for anticipated cost savings identified by Kelso.
"Consolidated EBITDA" as defined under the credit agreement for the senior
credit facilities is not the same as "Consolidated EBITDA" as used in the
indenture under which the notes are issued. The term "Consolidated EBITDA" is
used in the indenture as part of the calculation of the term "Consolidated
Coverage Ratio", which is used for a number of purposes, including determining
our ability to incur additional indebtedness.
OPERATING ACTIVITIES
Net cash used in operating activities for the Successor Period February 1, 2005
to March 31, 2005 of $33.1 million was principally the result of a net loss of
$3.2 million, an increase in accounts receivable of $6.7 million and a decrease
of $16.0 million in accrued liabilities. The decrease in accrued liabilities is
primarily related to the payment of $18.5 million under a separation agreement
with the former Chairman, partially offset by approximately $3.6 million of
accrued interest expense related to the new borrowings incurred in connection
with the merger transaction.
Net cash provided by operating activities for the Predecessor Period January 1,
2005 to January 31, 2005 of $0.2 million was due primarily to net earnings of
$2.0 million, a decrease in accounts receivable of $6.0 million, partially
offset by an increase in inventories of $6.1 million. The increase in accrued
liabilities of $21.7 million is primarily related to $18.5 million for a payment
due under a separation agreement with the former Chairman and approximately $2.8
million for advertising and promotion. The increase in income taxes
receivable/payable of $11.6 million is primarily related to the recording of an
anticipated federal income tax refund of approximately $11.4 million
attributable to the utilization of a net operating loss carry-back. The
recording of deferred tax assets of approximately $13.0 million is primarily
attributable to net operating loss carry-forwards.
32
INVESTING ACTIVITIES
Net cash used in investing activities of $378.0 for the Successor Period
February 1, 2005 to March 31, 2005 was primarily used for the purchase of
outstanding common stock and stock options of Del Laboratories, Inc. in
connection with the merger transaction.
Net cash used in investing activities for the Predecessor Period January 1, 2005
to January 31, 2005 of $0.8 million was primarily related to capital spending
for tooling, plates & dies, and manufacturing machinery and equipment.
FINANCING ACTIVITIES
Net cash provided by financing activities for the Successor Period February 1,
2005 to March 31, 2005 of $412.9 million was primarily due to proceeds of $200.0
million received from the issuance of the term loan, proceeds of $173.8 million
received from the issuance of $175.0 million of 8% Senior Subordinated Notes at
99.34%, and proceeds of approximately $138.2 million contributed by affiliates
of Kelso, the continuing investors and a third party investor. Proceeds of $69.3
million were used to repay existing debt, $29.3 million was used to pay
financing, legal, advisory, accounting and certain other fees incurred in
connection with the merger transaction, and $0.5 million was used to reduce the
outstanding principal under the term loan.
Net cash used in financing activities for the Predecessor Period January 1, 2005
to January 31, 2005 of approximately $0.9 million was primarily to reduce a
portion of the outstanding balance on the revolving credit agreement.
The Company does not use any off-balance sheet financing arrangements.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual obligations as of March 31, 2005, the
Company has included the following table:
Payments Due by Period
----------------------
($000)
Less 1 - 2 2 - 3 3 - 5 After 5
Total 1 Year Years Years Years Years
----- ------ ----- ----- ----- -----
Senior subordinated notes $175,000 $ -- $ -- $ -- $ -- $175,000
Term loan facility 199,500 2,000 2,000 2,000 4,000 189,500
Mortgage on land and buildings 1,243 52 55 58 1,078 --
Capital leases 298 122 130 46 -- --
Operating leases 33,266 4,237 3,825 3,407 6,137 15,660
-------- -------- -------- -------- -------- --------
Total contractual obligations (a) $409,307 $ 6,411 $ 6,010 $ 5,511 $ 11,215 $380,160
======== ======== ======== ======== ======== ========
(a) The Company expects to contribute approximately $5.0 million in fiscal year
2005 to fund its pension plans. These expected pension contributions are not
included in the above table.
33
DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company makes estimates and assumptions in the preparation of its financial
statements in conformity with U.S. generally accepted accounting principles.
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 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 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.
34
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 the 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.
The Company constructs and purchases display fixtures to be used in the stores
of its cosmetic segment retail customers to attract customer attention and to
display products available under the Company's various brands. The display is
included in inventory by the Company until it is shipped to the retail customer,
at which time it is reclassified from inventory to other assets and amortized as
a selling expense over the estimated useful life of twenty four months from date
of shipment.
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.
35
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, 2005, 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 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.
INCOME TAXES
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." This statement establishes financial accounting
and reporting standards for the effects of income taxes that result from an
enterprise's activities during the current and preceding years. It requires an
asset and liability approach for financial accounting and reporting of income
taxes. Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carry-forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
The realization of tax benefits of deductible temporary differences and
operating loss or tax credit carry-forwards will depend on whether the Company
will have sufficient taxable income of an appropriate character within the
carry-back and carry-forward period permitted by the tax law to allow for
utilization of the deductible amounts and carry-forwards. Without sufficient
taxable income to offset the deductible amounts and carry-forwards, the related
tax benefits would expire unused. A valuation allowance is recorded when
management determines that it is more likely than not that some portion or all
of the deferred tax assets will not be realized. The Company considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies, among other factors, in making this assessment. In
the event the Company were to determine that it would not be able to realize
some portion or all of its deferred tax assets in the future, an adjustment to
the deferred tax assets would be charged to earnings in the period such
determination was made. There was no valuation allowance as of the Successor
Period March 31, 2005, the Predecessor Period January 31, 2005, or the
Predecessor Period December 31, 2004 as the Company believes it is more likely
than not that the deferred tax assets will be realized.
36
NEW ACCOUNTING PRONOUNCEMENTS
In December 2004, the FASB issued Statement No. 123 (revised 2004), "Share Based
Payment." Statement 123(R) requires an entity to recognize the grant-date fair
value of stock options and other equity-based compensation issued to employees
in the income statement, but expresses no preference for a type of valuation
model. Statement 123(R) sets accounting requirements for "share-based"
compensation to employees, including employee stock purchase plans and carries
forward prior guidance on accounting for awards to non-employees. In addition,
accounting for employee stock ownership plans will continue to be accounted for
in accordance with Statement of Position 93-6 and awards to most non-employee
directors will be accounted for as employee awards. Statement 123(R) is
effective for public companies as of the beginning of the first annual reporting
period that begins after June 15, 2005 and for annual periods beginning after
December 15, 2005 for non-public entities, however, early adoption is
encouraged. The Company is in the process of assessing whether the adoption of
Statement 123(R) will have an impact on the Company's consolidated financial
statements.
In November 2004, the FASB issued Statement No. 151 "Inventory Costs". Statement
No. 151 amends the guidance in ARB No. 43, Chapter 4, "Inventory Pricing," to
clarify the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). In addition, this Statement
requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities.
Statement No. 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company is in the process of assessing
whether the adoption of Statement 151 will have an impact on the Company's
consolidated financial statements.
FORWARD - LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and Financial
Condition and other sections of this Form 10-Q include "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All
statements other than statements of historical information provided herein are
forward-looking statements and may contain information about financial results,
economic conditions, trends, certain risks, uncertainties and other factors that
could cause actual results to differ materially from any future results implied
by such forward-looking statements. Factors that might cause such a difference
include, but are not limited to: delays in introducing new products or failure
of consumers to accept new products; actions by competitors, which may result in
mergers, technology improvement or new product introductions; the dependence on
certain national chain drug stores, food stores and mass merchandiser
relationships due to the concentration of sales generated by such chains;
changes in fashion-oriented color cosmetic trends; the effect on sales of lower
retailer inventory targets; the effect on sales of political and/or economic
conditions; the Company's estimates of costs and benefits, cash flow from
operations and capital expenditures; interest rate or foreign exchange rate
changes affecting the Company and its market sensitive financial instruments
including the Company's qualitative and quantitative estimates as to market risk
sensitive instruments; changes in product mix to products which are less
profitable; shipment delays; depletion of inventory and increased production
costs resulting from disruptions of operations at any of our manufacturing or
distribution facilities; regulatory requirements and government regulatory
action; failure to maintain satisfactory compliance with good manufacturing
practice, or GMP, requirements; 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 economies. 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," "believe" or "continue" or the negative thereof or other
variations thereon.
37
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our market risk sensitive instruments is the
potential loss arising from material adverse changes in interest rates and
foreign currency exchange rates.
INTEREST RATE RISK
Prior to the transactions, we did not enter into dertivative type agreements
related to interest rate risk. However, our senior credit facility requires us
to enter into interest rate protection agreements to provide interest rate
protection for a minimum of 50% of our consolidated funded indebtedness for
three years. Effective March 21, 2005, we entered into an interest rate swap to
provide the required interest rate protection. The swap contract was for a
nominal amount of $12.5 million for a three-year term.
FOREIGN EXCHANGE RISK
We are subject to risk from changes in the foreign exchange rate for our foreign
subsidiaries which use foreign currency as their functional currency and is
translated into United States dollars. Such changes result in cumulative
translation adjustments which are included in shareholders' equity and in the
determination of other comprehensive income (loss). Intercompany transactions
between us and our foreign subsidiaries are recorded by the foreign subsidiaries
in their functional currency.
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 annual 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 period
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 period covered by this
report.
The Company is continuing to perform the systems and process evaluation testing
of its internal controls over financial reporting, as required by Section 404 of
the Sarbanes-Oxley Act, in order to allow management to report on, and our
Registered Independent Public Accounting Firm to attest to, our internal
controls over financial reporting which will be required for the fiscal year
ending December 31, 2006. As a result, the evaluation and testing continues to
require significant costs and management time. In the course of its ongoing
evaluation and testing, management has identified certain deficiencies and
implemented remediation plans or is in the process of planning remediation for
the deficiencies.
38
PART II - OTHER INFORMATION
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Pursuant to the terms of the merger, each share of the Company's outstanding
common stock was converted into the right to receive $35.00 in cash. Also, each
option to purchase the Company's common stock was cashed out at a price equal to
the excess, or spread, of the $35.00 per share merger consideration over the per
share exercise price of each option. The Company is now a wholly owned
subsidiary of DLI Holding II Corp., an affiliate of Kelso & Company.
ISSUER PURCHASES OF EQUITY SECURITIES
Total Number of Shares
(or Units) Purchased
Total Number of Shares Average Price Paid per as Part of Publicly
Period (or Units) Purchased Share (or Unit) Announced Programs
January 9,399 $34.62 --
February -- -- --
March -- -- --
------ ------ ------
Total 9,399(1) $34.62 (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.
39
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on January 21, 2005. At the
meeting, the stockholders approved the Agreement and Plan of Merger dated as of
July 1, 2004, among DLI Holding Corp., DLI Acquisition Corp., a wholly-owned
subsidiary of DLI, and Del Laboratories, Inc. The voting on the proposal was as
follows:
For 8,379,089
Against 54,343
Abstain 13,319
Item 6. EXHIBITS
Exhibits
Exhibit 31.1 Certification of Chief Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2 Certification of Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 Certification of Chief Executive Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification of Chief Financial Officer Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
Please see attached S.906 certifications - since the S-4 has been filed,
the Company is deemed to be an "issuer" under the Sarbanes-Oxley Act.
40
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: May 16, 2005 /s/ William McMenemy
--------------------
William McMenemy
President and
Chief Executive Officer
Date: May 16, 2005 /s/ Enzo J. Vialardi
--------------------
Enzo J. Vialardi
Executive Vice President and
Chief Financial Officer
41