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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-5439
DEL LABORATORIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-1953103
(State or other jurisdiction of (I.R.S. Employer I.D. Number)
incorporation or organization)
178 EAB PLAZA, UNIONDALE, NY 11556
(Address of Principal Executive Offices) (Zip Code)
(516) 844-2020
Registrant's telephone number, including area code:
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $1 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the Common Stock held by non-affiliates of the
Registrant on March 23, 2000 was $29,021,724. On such date, the average bid and
asked price for the Common Stock was $8.1875 per share.
The number of shares of Common Stock outstanding as of March 23, 2000 was
7,543,726 shares.
DOCUMENTS INCORPORATED BY REFERENCE:
DOCUMENT PART OF THE FORM 10-K INTO WHICH THE DOCUMENT IS INCORPORATED
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Definitive Proxy Statement for 2000 Annual Part III, Items 10, 11, 12 and 13
Meeting of Stockholders
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PART I
ITEM 1--BUSINESS
Del Laboratories, Inc. (the "Company") manufactures, markets and distributes
cosmetics and proprietary over-the-counter pharmaceuticals. The Company's
principal cosmetics products are nail care products, nail color, color
cosmetics, beauty implements, bleaches and depilatories, personal care products,
and other related cosmetic items. The Company's cosmetics products are marketed
under such well-known brand names as Sally Hansen Hard as Nails and Sally Hansen
Professional Nail (nail care and nail color products), CornSilk (face make-up),
Naturistics (color cosmetics and bath and body care), LaCross (beauty
implements), and N.Y.C. New York Color (color cosmetics). The Company's
proprietary pharmaceutical products include oral analgesics, acne treatment
products, first aid products and eye/ear medications. The Company's
pharmaceutical products are marketed under such well-known brand names as Orajel
and Tanac (oral analgesics), Propa pH (acne treatment), Pronto (pediculicides),
Arthricare (topical arthritis treatment), Stye (ophthalmic ointment) and
Auro-Dri (ear remedy). The Company's products are sold principally in the United
States and Canada to wholesalers and independent and chain drug, mass
merchandisers and food stores.
The Company seeks to increase sales by aggressively marketing its products
under established brand names. The Company targets the mass market, which
accounts for a major portion of the decorative color cosmetics market and the
majority of the over-the-counter pharmaceuticals market. The Company's customers
in the mass market channel include Walgreens, Rite Aid, CVS, and Eckerd, major
drug store chains; Wal-Mart, K-Mart and Target, major national chain mass
merchandisers; and numerous regional chain drug stores and mass merchandisers.
The Company also distributes its pharmaceutical products to drug wholesalers,
including McKesson Drug and Bergen Brunswig and national food chains, including
Kroger and Albertson's. Other than Wal-Mart Stores, Inc., which accounted for
25.4%, 21.5% and 22.7% of the Company's total net sales for 1999, 1998 and 1997,
respectively, and Walgreens which accounted for 10.4% and 10.3% of the Company's
total net sales in 1999 and 1998, respectively, no single customer accounted for
more than 10% of the Company's total net sales.
The Company advertises its products on television and radio and in
magazines. In-store displays and promotional activities are also utilized to
attract consumer attention and to inform them of the products available under
the Company's various brands. Cooperative advertising programs with retailers
are also employed to further enhance consumer awareness of the Company's
products and brands. Advertising expenditures were $29.0 million in 1999, or
10.8% as a percentage of total net sales.
The Company utilizes two in-house national sales organizations, one for its
cosmetics product lines and one for its pharmaceutical product lines. The
Company also employs independent manufacturers' representatives in selected
geographic areas where a full-time sales employee would not be economically
justified.
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Certain financial information regarding the Company's industry segments is
set forth in the table below:
INDUSTRY SEGMENTS
(IN THOUSANDS OF DOLLARS)
1999 1998 1997
-------- -------- --------
Net sales to unaffiliated customers:
Cosmetics............................................... $203,484 $213,714 $207,260
Pharmaceuticals......................................... 63,863 61,148 55,750
Operating income (loss):
Cosmetics............................................... (11,938) 10,381 15,424
Pharmaceuticals......................................... 9,313 12,513 9,828
Identifiable assets:
Cosmetics............................................... 122,417 120,664 87,449
Pharmaceuticals......................................... 22,674 20,205 16,635
Corporate (unallocated assets).......................... 35,470 36,605 45,230
The Company was incorporated in Delaware in 1961. The Company's cosmetics
business is conducted primarily by the Company and its wholly-owned subsidiary,
Del Laboratories (Canada) Inc., which sells the Company's cosmetics products to
the Canadian market. The Company's pharmaceuticals business is conducted
primarily by the Company's wholly-owned subsidiary, Del Pharmaceuticals, Inc.,
and its indirect wholly-owned subsidiary, Del Pharmaceutics (Canada) Inc., which
sells the Company's pharmaceutical products to the Canadian market.
The Company's products are sold in a limited number of foreign countries.
Export net sales (which exclude sales in Canada and Puerto Rico) have
historically not exceeded 5.0% of the Company's total net sales in any year. In
1999, export net sales represented approximately 1.7% of the Company's total net
sales. The Company has formed a limited number of subsidiaries to conduct its
business in certain foreign countries. In certain other foreign countries, the
Company licenses local representatives and appoints local distributors to sell
the Company's products.
The Company sells standard packaged cosmetic and over-the-counter
pharmaceutical products. The Company's customers expect quick response on
standard merchandise orders. The Company does not have a material amount of
order backlog. Consistent with the packaged goods industry, the Company accepts
authorized returns of unmerchantable, defective or discontinued products.
The Company purchases raw materials used in its manufacturing processes from
various other manufacturers, paperboard suppliers and bottle distributors. The
Company has not experienced any difficulty obtaining raw materials and believes
that such materials are readily available.
The Company expended approximately $5,219,000, $4,927,000 and $5,038,000 in
1999, 1998 and 1997, respectively, on research activities relating to the
development of new products, clinical and regulatory affairs and quality
control, all of which activities are conducted internally by the Company.
Competition in both the cosmetics and over-the-counter pharmaceuticals
markets is intense. Many of the principal competitors in each of the Company's
industry segments are well-established firms with greater financial and
marketing resources. Frequent new product introductions and attendant
advertising characterize both industry segments in which the Company operates.
Consumer brand preferences in the Company's industry segments are generally
influenced by advertising, promotional support and price. The cosmetics industry
is sensitive to consumer purchasing power. The Company's competitors in the
cosmetics market include Revlon, Inc., Procter and Gamble (Cover Girl, Oil of
Olay), Cosmair (Maybelline) and L'Oreal and, in the over-the-counter
pharmaceuticals market, include Whitehall-Robbins Division of American Home
Products Corp., Warner-Lambert Company, Pfizer, Block Drug, Thompson Medical,
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Procter and Gamble Co., SmithKline Beecham, Bristol Myers Squibb, Colgate
Palmolive and Johnson and Johnson.
The Company has registered its principal trademarks in each segment of its
business both in the United States and in many countries throughout the world.
The Company considers its trademarks to be material assets, and the registration
and protection of its trademarks in the aggregate to be important to its
business, in that the success of certain of the products is due at least in part
to the goodwill associated with the Company's primary brand names. The Company
has also been issued several United States patents, expiring at various times
through 2015, and has licensed certain intellectual property from third parties.
While the Company believes its patents and licenses to be important, it does not
consider its business as a whole to be dependent on such licenses or patent
protection.
The Company currently has approximately 1,500 employees. Approximately 440
of the Company's employees are represented by two labor unions. The Company has
not experienced any work stoppages and considers its employee and labor
relations to be satisfactory.
ITEM 2--PROPERTIES
The Company's corporate offices are located in 44,000 square feet of leased
space in Uniondale, New York.
The Company's principal manufacturing facilities for both the cosmetics and
pharmaceutical segments are located in two buildings at 565 Broad Hollow Road,
Farmingdale, New York. One building is a brick faced concrete block structure
containing approximately 120,000 square feet of floor space. The other is a
steel beamed and brick faced concrete block building, adjacent to the
Farmingdale facility described above, containing approximately 20,000 square
feet of floor space. Both buildings are owned by the Company.
The Company also owns certain property used for manufacturing facilities for
its cosmetics segment in Newark, New Jersey. The Newark buildings are brick
faced concrete block and contain approximately 90,000 square feet of floor
space.
The Company owns property located in Canajoharie, New York, consisting of a
two-story brick and steel building with approximately 50,000 square feet of
floor space. This building is used by the cosmetics segment.
In February 2000, the Company acquired property located in the City of
Barrie, Province of Ontario, Canada, consisting of a building with approximately
68,000 square feet of floor space. The facility is used for manufacturing and
shipping and contains the administrative offices of its Canadian subsidiaries.
In addition, the Company owns a 39,000 square foot facility which prior to
February 2000 was used by its Canadian subsidiaries and is in contract for sale.
The Company also owns property located in the City of Little Falls, New
York, consisting of a building with approximately 63,000 square feet of floor
space. The facility is used for production and warehousing. The Company owns a
second building located in close proximity to the Little Falls facility
described above. This 100,000 square foot facility is a one-story steel and
masonry industrial plant built in 1974 and is used for production and
warehousing.
The Company's distribution center is located in two owned buildings
containing approximately 225,000 square feet, in Rocky Point, North Carolina.
Both buildings are of insulated metal construction. The buildings and land are
subject to a first mortgage. The distribution center services both the cosmetics
and pharmaceutical segments.
The Company also has short-term leases for space in public warehouses. The
space is primarily used for the cosmetics segment.
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The Company believes that its facilities are adequate to meet the needs of
the Company, operating at reasonable levels of production.
ITEM 3--LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business.
ITEM 4--SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5--MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange under
the symbol "DLI". The range of high and low sales prices as reported in the
consolidated transaction reporting system of such exchange for each quarterly
period during the past two years is as follows:
1999 1998
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HIGH LOW HIGH LOW
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First Quarter............................................... $25.00 $17.75 $33.19 $27.28
Second Quarter.............................................. $19.00 $13.75 $32.75 $21.75
Third Quarter............................................... $17.25 $13.00 $28.50 $19.50
Fourth Quarter.............................................. $14.06 $ 7.50 $26.38 $16.00
There were 490 holders of record of the Company's common stock at
December 31, 1999. This does not include beneficial holders whose shares are
held of record by nominees. The Company paid regular quarterly dividends of
$.026 from January 1997 through December 1997; $.035 from January 1998 through
September 1999 and a 2% stock dividend in December 1999. The Company has paid
uninterrupted dividends for the past twenty-five years. The per share
information set forth above has been adjusted for a 4-for-3 stock split on
February 20, 1998, effected in the form of a stock dividend.
The terms of the Company's various borrowing agreements provide, among other
things, for restrictions on the payment of cash dividends and certain other
expenditures. At December 31, 1999, no amounts were available for cash dividends
or the repurchase of treasury stock.
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ITEM 6--SELECTED FINANCIAL DATA
(Amounts in Thousands Except Per Share and Employee Data)
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Operating data:
Net sales....................................... $267,347 $274,862 $263,010 $232,951 $212,048
Net earnings (loss)............................. (4,002) 11,077 13,127 9,278 7,025
Earnings (loss) per common share: (a)
Basic......................................... (0.53) 1.43 1.69 1.22 .92
Diluted....................................... (0.53) 1.34 1.56 1.12 .84
Dividends per share: (a)
Cash.......................................... .105 .14 .105 .079 .079
Stock......................................... 2% -- -- -- --
Weighted average common shares outstanding: (a)
Basic......................................... 7,530 7,733 7,745 7,597 7,614
Diluted....................................... 7,530 8,288 8,415 8,320 8,328
Balance sheet data:
Total assets.................................. $180,561 $177,474 $149,314 $122,382 $114,717
Long-term debt................................ 75,750 59,400 43,879 40,000 40,000
Working capital............................... 74,472 62,728 53,576 51,266 42,034
Shareholders' equity.......................... 50,873 59,097 54,530 44,842 38,021
Other data:
Capital additions............................. $ 7,288 $ 7,224 $ 15,230 $ 5,327 $ 7,569
Approximate # of employees.................... 1,500 1,560 1,390 1,329 1,243
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(a) Adjusted to reflect a 2% stock dividend effective November 30, 1999, 4-for-3
stock splits effective February 20, 1998 and November 8, 1996 and a 2-for-1
stock split effective June 16, 1995.
ITEM 7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
NET SALES. Net sales were $267.3 million and $274.9 million for 1999 and
1998, respectively, a decrease of $7.6 million or 2.8%. Cosmetics net sales were
$203.5 million and $213.7 million for 1999 and 1998, respectively, a decrease of
$10.2 million or 4.8%. The net sales decrease is due primarily to lower
shipments of the Naturistics cosmetics and bath & body care line, as a result of
the previously disclosed market repositioning of the line and, an increase in
product returns, partially offset by shipments of N.Y.C. New York Color
cosmetics introduced in 1999.
Pharmaceutical net sales were $63.9 and $61.1 million for the 1999 and 1998,
respectively, an increase of $2.8 million or 4.6%. The increase is primarily due
to volume growth in the Orajel family of products.
COST OF SALES. Cost of sales were $124.9 million or 46.7% of net sales in
1999, compared to $115.8 million or 42.1% of net sales in 1998, an increase of
$9.1 million or 7.9%. The increase in cost of sales, as a percentage of net
sales, is due primarily to a change in Cosmetics sales mix, increased returns
and, an increase in the inventory valuation reserve to reflect the estimated
market value of the Naturistics inventory pursuant to the Company's plan to
reduce excess and slow moving inventory of this brand.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $145.0 million, or 54.2% of net sales in 1999 compared to $136.2 million or
49.5% of net sales in 1998. The increase as a
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percentage of net sales is primarily attributable to higher promotional costs,
increases in information technology expenses and the impact of product returns
on net sales.
GAINS ON SALES OF FACILITY AND LAND. In February 1999, the Company sold a
warehouse facility in Plainview, New York for $2.7 million, resulting in a gain
before income taxes of $1.7 million. At December 31, 1998, this facility was
included in property, plant and equipment and was accounted for as a held for
sale asset. On December 8, 1999, the Company sold a parcel of land in
Farmingdale, New York for $2.3 million, resulting in a gain before income taxes
of $1.3 million.
NET INTEREST EXPENSE. Net interest expense was $5.9 million in 1999
compared to $4.4 million in 1998. The increase is due to higher average
borrowings in 1999 as compared to 1998 due principally to the financing of the
acquisition of intellectual property rights and other assets of the CornSilk
brand of facial make-up in May 1998, higher working capital requirements and,
increased borrowing rates.
INCOME TAXES. The Company recorded a tax benefit of $1.5 million in 1999
based on an estimated 27% tax benefit for the year ended December 31, 1999,
compared to an effective annual tax rate of 41% in 1998.
NET EARNINGS (LOSS). As a result of the above, the Company incurred a net
loss of $4.0 million in 1999 compared to net earnings of $11.1 million or 4.0%
of net sales in 1998.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
NET SALES. Net sales were $274.9 million and $263.0 million for 1998 and
1997, respectively, an increase of $11.9 million or 4.5%. Cosmetic net sales
were $213.7 million and $207.3 million for 1998 and 1997, respectively, an
increase of $6.4 million or 3.1%. The increase in cosmetic net sales resulted
primarily from volume growth in existing products and new product introductions
in the Sally Hansen, LaCross and CornSilk brands. The cosmetic net sales
increase in 1998 was partially offset in the fourth quarter by incremental sales
returns of approximately $4.0 million associated with the acceleration of a
program to reposition and repackage the Naturistics cosmetics line.
Pharmaceutical net sales were $61.2 million and $55.8 million for 1998 and
1997, respectively, an increase of $5.4 million or 9.5%. The increase in
pharmaceutical net sales resulted primarily from volume growth in the Orajel
family of products and the Pronto line of pediculicides.
COST OF SALES. Cost of sales were $115.8 million, or 42.1% of net sales in
1998, compared to $101.1 million, or 38.4% of net sales in 1997, an increase of
$14.7 million, or 14.6%. The increase in cost of sales, as a percentage of net
sales, is primarily due to higher product returns, inventory write-downs of the
Naturistics cosmetics and bath & body care line of $1.5 million in the fourth
quarter of 1998, higher manufacturing costs and a change in the mix of business
compared to prior year.
SELLING AND ADMINISTRATIVE EXPENSES. Selling and administrative expenses
were $136.2 million in 1998 compared to $136.7 million in 1997, a decrease of
$.5 million. The increase in net sales together with a reduction in advertising
and promotional expenditures are the primary reasons for the decrease in selling
and administrative expenses as a percentage of net sales to 49.5% in 1998 from
52.0% in 1997.
OPERATING INCOME. As a result of the above, operating income decreased by
9.3% to $22.9 million or 8.3% of net sales in 1998 compared to $25.3 million or
9.6% of net sales in 1997.
NET INTEREST EXPENSE. Net interest expense was $4.4 million in 1998
compared to $3.4 million in 1997. Interest expense increased $.7 million to
$4.7 million in 1998 from $4.0 million in 1997 due primarily to borrowings
related to the acquisition of intellectual property rights and other assets of
the Corn Silk brand
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of facial make-up in May 1998 and to imputed interest (non-cash expense) related
to the purchase of land and buildings in North Carolina in May 1997.
INCOME TAXES. The Company's effective tax rate was 40% in both 1998 and
1997. In the fourth quarter of 1998, the Company revised its 1998 projected
effective tax rate from 41% to 40% resulting in an additional tax benefit of $.2
million.
NET EARNINGS. As a result of the above, net earnings decreased to
$11.1 million or 4.0% of net sales compared to $13.1 million or 5.0% of net
sales in 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had cash and cash equivalents of
$3.6 million as compared to $3.7 million at December 31, 1998.
Net cash used in operating activities was $8.0 million and $2.5 million for
the years ended December 31, 1999 and December 31, 1998, respectively. Net cash
provided by operating activities was $17.9 million for the year ended 1997. The
increase of $5.5 million in net cash used in operating activities for 1999
compared to 1998 resulted primarily from lower earnings, decreases in accounts
payable and accrued liabilities, partially offset by decreased cash used in
accounts receivable and inventories.
Cash of $4.6 million was provided by the sales of land and a facility in
1999. Cash used for property, plant and equipment additions was $7.3 million,
$7.2 million and $10.8 million for 1999, 1998 and 1997, respectively. Capital
expenditures for 1999 and 1998 were primarily for manufacturing machinery and
equipment. Cash used for capital expenditures in 1997 included $2.0 million of
equipment for the Company's new distribution facility. In 1997, the Company
exchanged a non-interest bearing purchase money promissory note discounted to
$4.4 million for land and buildings in North Carolina to be used for a new
distribution facility.
Net cash provided by (used in) financing activities was $10.5 million,
$10.5 million, and ($6.6 million) for 1999, 1998 and 1997, respectively. In 1999
and 1998, cash was provided by proceeds received under the revolving credit
agreement with a bank and short-term borrowings under lines of credit with
banks. Cash was used primarily for acquisition of shares of the Company's common
stock aggregating $4.5 million, $7.3 million, and $5.9 million in 1999, 1998 and
1997, respectively, repayments of short-term borrowings of $3.5 million and
$15.7 million in 1999 and 1998, respectively, and dividend payments of
$1.0 million, $1.0 million and $0.7 million in 1999, 1998 and 1997,
respectively. As of December 31, 1999, the Company was authorized to purchase up
to 211,255 additional shares based on the existing Board authorization. At
December 31, 1999, no amounts were available for cash dividends or the
repurchase of treasury stock.
On February 25, 2000, the senior notes were amended and restated primarily
to reduce the $8,000,000 principal repayments due on May 31, 2001 and May 31,
2002. The amended notes require annual principal repayments of $4,000,000 on
May 31, 2001 and May 31, 2002; $8,000,000 on May 31, 2003 and May 31, 2004 and
the balance on May 31, 2005. The terms of the amended agreement include
covenants, which provide among other things, for the maintenance of financial
covenants and ratios relating to consolidated net worth, restrictions on cash
dividends, the purchase of treasury stock, and certain other expenditures.
On February 25, 2000, the Company amended the revolving credit agreement
entered into in December 1998. The amendment increased the facility to
$47,500,000 from $20,000,000 and extended the expiration to February 25, 2003.
In addition, the notes under lines of credit were paid and cancelled as part of
this amendment. After giving effect to the refinancing of the lines of credit
this amended revolving credit agreement increased the Company's borrowing
capacity by $10,000,000. Under the terms of the agreement, interest rates on
borrowings are based on, at the Company's option, LIBOR, prime or federal funds
rates. The terms of the agreement include a commitment fee based on unutilized
amounts, an annual agency fee and covenants which provide among other things,
for the maintenance of financial covenants and ratios relating to consolidated
net worth, restrictions on cash dividends, the purchase of treasury stock,
8
and certain other expenditures. The revolving credit facility, as amended, is
collateralized by the Company's trademarks and accounts receivable until such
time as the borrowings under the revolving credit agreement are less than
$22,500,000 and a certain financial ratio is achieved. The senior note holder
and the lenders under the revolving credit agreement have entered into an
intercreditor agreement which includes the pro rata sharing of such collateral.
No compensating balances are required.
Under the Company's purchase money promissory note for its property in North
Carolina, the final payment of $3,850,000 is due on May 15, 2000. The Company
has received a commitment to refinance this note through a mortgage on land and
buildings and anticipates completing the refinancing prior to May 15, 2000.
On February 22, 2000, the Company purchased a 68,000 square foot
manufacturing, warehousing and office facility in Barrie, Ontario for
$1,828,000. The purchase was financed with a combination of a mortgage bridge
loan and a five year mortgage. The existing 39,000 square foot manufacturing,
warehousing and office facility in Barrie, Ontario, was included in property,
plant and equipment as of December 31, 1999, with a net book value of
approximately $458,000 and is currently in contract for sale with estimated
proceeds of $790,000. Approximately $631,000 of the proceeds will be used to
satisfy the mortgage bridge loan.
Estimated cash flow from operations and available working capital lines of
credit along with leasing transactions, are expected to be adequate to fund the
Company's anticipated working capital and property, plant and equipment
requirements in the foreseeable future.
The Company believes that general inflation has had no significant impact on
its earnings (loss) from operations during the last three years.
YEAR 2000 CONVERSION
The Company addressed the issue of computers potentially misinterpreting
dates after the turn of the century. If not corrected, computer applications
could have failed or created erroneous results. A committee specifically created
to resolve Year 2000 issues met regularly. It was led by a member of the Board
of Directors and comprised of senior corporate executives, a cross section of
key departmental personnel and an outside expert.
The Company's efforts to identify and address issues relating to its
readiness for Year 2000 included four phases: Identification, Assessment,
Remediation and Testing. The identification phase consisted of an inventory of
computer-based systems, software, third party programs and hardware including
embedded microprocessors. The assessment phase focused on the identification of
those applications most critical to the business including examination of all
coding used for date calculations. The remediation phase consisted of systems
changes by replacement, modification or upgrade. The testing phase included unit
tests of each application followed by fully integrated systems tests with dates
rolled forward on test machines to check performance and computational accuracy.
All significant suppliers, customers, financial institutions and any other
organization doing business electronically with the Company were contacted in
order to identify potential areas of concern. All phases of the project are 100%
complete.
The Company estimates that remediation costs of approximately $1,000,000
were incurred for replacement systems, discovery tools and expenses necessary to
achieve Year 2000 compliance.
Based upon the Company's review as indicated above and the results of
confirmatory testing after the changeover to 2000, no problems related to Y2K
have resulted which have any material impact on the Company's results of
operations, liquidity or financial position. The Company will continue to
monitor any Y2K issues for the remainder of 2000.
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FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and
Financial Condition and other sections of this Annual Report 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 and known uncertainties. The
forward-looking statements contained herein are subject to certain risks and
uncertainties that could cause actual results to differ materially from those
reflected in the 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, and trends in the
general economy.
Readers are cautioned not to place undo reliance on these forward-looking
statements, which reflect management's analysis, judgement, 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.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standard No, 133, "Accounting for Derivative Instruments and Hedging
Activities" (SFAS No. 133) as amended by SFAS 137, which is effective for
quarters of fiscal years beginning after June 15, 2000. SFAS No. 133 provides
guidance for accounting for all derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company does not believe that the implementation of SFAS No. 133 will have a
significant impact on its financial position or results of operations.
ITEM 7A--MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in the Company's market risk sensitive instruments
is the potential loss arising from adverse changes in interest rates and foreign
currency exchange rates.
INTEREST RATE RISK
The Company's borrowings at December 31, 1999 under the revolving credit
agreement and lines of credit expose earnings to changes in short-term interest
rates since interest rates on the underlying obligations are either variable or
fixed for such a short period of time as to effectively become variable. The
Company believes that a hypothetical 10% change in interest rates amounts to
approximately $0.3 million and could have a material effect on earnings.
FOREIGN EXCHANGE RISK
The Company is subject to risk from changes in the foreign exchange rate for
its foreign subsidiaries which use a foreign currency as their functional
currency and is translated into U.S. dollars. Such changes result in cumulative
translation adjustments which are included in shareholders' equity and in the
determination of other comprehensive income. Intercompany transactions between
the Company and its foreign subsidiaries are recorded by the foreign
subsidiaries in their functional currency. The potential loss
10
resulting from a hypothetical 10% adverse change in the quoted foreign currency
exchange rate amounts to approximately $0.5 million. Actual results may differ.
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Consolidated Financial Statements and Schedule included separately
herein.
ITEM 9--CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10--DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
(a) The information required with respect to Directors is set forth under the
captions "Election of Directors--Information Concerning Directors" and
"Security Ownership of Certain Beneficial Owners--Section 16 (a) Beneficial
Ownership Reporting Compliance" in the Company's definitive Proxy Statement
for the 2000 Annual Meeting of Stockholders to be filed pursuant to
Regulation 14A and incorporated herein by reference.
(b) The executive officers of the Company, the positions held by them, their
ages and the years in which they began to serve in the position or office
held as of December 31, 1999 are as follows:
YEAR IN
WHICH BEGAN
TO SERVE IN
POSITION OR AS
NAME POSITION AGE EXECUTIVE OFFICER
- ---- -------- -------- -----------------
Dan K. Wassong....................... Chairman, President and Chief Executive 69 1969
Officer, Director
Charles J. Hinkaty................... Vice President, President of Del 50 1985
Pharmaceuticals, Inc., Director
Enzo J. Vialardi..................... Executive Vice President, Chief Financial 63 1998
Officer
William H. McMenemy.................. Executive Vice President of Marketing, 53 1980
Cosmetics Division, North America
Harvey P. Alstodt.................... Executive Vice President of Sales, 60 1988
Cosmetics Division, North America
James F. Lawrence.................... Group Vice President--Operations 65 1993
Gene L. Wexler....................... Vice President, General Counsel and 44 1999
Secretary
Thomas Redder........................ Vice President--Chief Information Officer 52 1996
There is no arrangement or understanding between any executive officer and
any other person pursuant to which he was selected as an officer. The executive
officers of the Company are elected annually at the meeting of the Board of
Directors immediately following the Annual Meeting of Stockholders. No family
relationship exists among any of the executive officers and directors of the
Company.
11
During the past five years, the principal occupation and employment of each
of the Company's executive officers has been his service in the respective
position shown in the above table, except as follows:
Enzo J. Vialardi has been Executive Vice President and Chief Financial
Officer of the Company since August 1998. Prior to that time, he served as an
independent consultant from January 1995 to August 1998.
Gene L. Wexler has been Vice President, General Counsel and Secretary of the
Company since September 1999. From January 1994 through March 1999, he was Vice
President, General Counsel and Assistant Secretary at Genovese Drug
Stores, Inc.
Thomas Redder has served as Vice President-Chief Information Officer of the
Company since February 1996. From 1986 through 1995, he was employed by Newsday
as Vice President, Information Systems
ITEM 11--EXECUTIVE COMPENSATION
The information required is set forth under the caption "Executive
Compensation" in the Company's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A and is
incorporated herein by reference.
ITEM 12--SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required is set forth under the captions "Securities
Ownership of Certain Beneficial Owners" and "Election of Directors--Information
Concerning Directors" in the Company's definitive Proxy Statement for the 2000
Annual Meeting of Stockholders to be filed pursuant to Regulation 14A and is
incorporated herein by reference.
ITEM 13--CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is set forth under the caption "Executive
Compensation" in the Company's definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders to be filed pursuant to Regulation 14A and is
incorporated herein by reference.
PART IV
ITEM 14--EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a) Documents filed as part of this report:
(1) and (2) See Consolidated Financial Statements and Schedule included
herein.
(3) Exhibit Index
b) There were no reports on Form 8-K filed during the quarter ended
December 31, 1999.
12
ITEM TITLE EXHIBIT NO. DESCRIPTION
- ---------- ----------- -----------
Articles of Incorporation and 3.1 (a) Restated Certificate of Incorporation as filed with
By-Laws the Delaware Secretary of State on March 29, 1996.
3.2 (b) Certificate of Amendment filed with the Delaware
Secretary of State on June 4, 1996.
3.3 Certificate of Amendment of the Restated Certificate
of Incorporation filed with the Delaware Secretary of
State on June 3, 1998.
3.4 (a) By-Laws as amended through December 14, 1995.
Material Contracts 10.1 (c) Employee Pension Plan, effective January 1, 1989
(amended and restated).
10.2 (d) Employee's Stock Ownership Plan, effective January 1,
1989.
10.3 (e) Amendment No. 1 to Employee's Stock Ownership Plan.
10.4 (c) Amendment No. 2 to Employee's Stock Ownership Plan.
10.5 (c) 401(k) Plan effective January 1, 1989 (amended and
restated).
10.6 Amendment No. 1 to 401(k) Plan adopted December 21,
1995.
10.7 Amendment No. 2 to 401(k) Plan adopted March 16, 2000.
10.8 (c) Supplemental Executive Retirement Plan (amended and
restated).
10.9 (i) Amendment No. 1 effective January 1, 1997 to
Supplemental Executive Retirement Plan.
10.10(j) Amendment No. 3 to Supplemental Executive Retirement
Plan.
10.11(e) 1984 Stock Option Plan, as amended to date.
10.12(f) 1994 Stock Plan, as amended as of May 27, 1999.
10.13(f) Annual Incentive Plan, as amended as of May 27, 1999.
10.14 Amended and Restated Employment Agreement dated as of
July 1, 1999 between the Registrant and Dan K.
Wassong.
10.15(e) Loan Agreement with Dan K. Wassong, dated as of
August 22, 1984 and related promissory notes.
10.16(c) Loan Agreement with Dan K. Wassong, dated as of April
9, 1988.
10.17(g) Loan Agreement with Dan K. Wassong, dated as of
November 14, 1990.
10.18(e) Employment Agreement with Charles J. Hinkaty, as
amended.
10.19(i) Amendment to Employment Agreement with Charles J.
Hinkaty, dated April 22, 1996.
10.20(e) Employment Agreement with Harvey P. Alstodt, as
amended.
13
ITEM TITLE EXHIBIT NO. DESCRIPTION
- ---------- ----------- -----------
10.21(i) Amendment to Employment Agreement with Harvey P.
Alstodt, dated April 22, 1996.
10.22 Amendment to Employment Agreement with Harvey P.
Alstodt dated December 30, 1997.
10.23(e) Employment Agreement with William H. McMenemy, as
amended.
10.24(i) Amendment to Employment Agreement with William H.
McMenemy, dated April 22, 1996.
10.25(j) Employment Agreement with Enzo J. Vialardi, dated
December 30, 1998.
10.26(j) Employment Agreement with James Lawrence, dated March
1993.
10.27(j) Amendment to Employment Agreement with James Lawrence,
dated July 12, 1995.
10.28(j) Second Amendment and Employment Agreement with James
Lawrence, dated March 31, 1998.
10.29(e) Life Insurance Agreement with Robert H. Haines, as
trustee, dated as of February 18, 1993.
10.30(h) Lease between Registrant and Coliseum Towers
Associates.
10.31(h) Purchase Money Promissory Note with Carver Boat
Corporation.
10.32 Amended and Restated Loan Agreement dated as of
February 25, 2000 among the Registrant, as borrower,
Del Pharmaceuticals, Inc. ("DPI"), Parfums
Schiaperlli, Inc. ("Parfums"), Royce & Rader, Inc.
("Royce") and 565 Broad Hollow Realty Corp. ("565"),
as guarantors, The Chase Manhattan Bank, as agent for
the lenders, and The Chase Manhattan Bank and European
American Bank, as lenders.
10.33 Form of Trademark Collateral Assignment and Security
Agreement dated as of February 25, 2000, between the
Registrant and The Chase Manhattan Bank, as Collateral
Agent. Similar agreements were executed by DPI and
Parfums.
10.34 Form of Security Agreement dated as of February 25,
2000 between the Registrant and The Chase Manhattan
Bank, as Collateral Agent. Similar agreements were
executed by DPI, Parfums, Royce and 565.
10.35 Form of General Guaranty dated as of February 25, 2000
by DPI in favor of The Chase Manhattan Bank, as
Collateral Agent. Similar agreements were executed by
Parfums, Royce and 565.
10.36 Amended and Restated Loan Agreement dated as of
February 25, 2000 among the Registrant, DPI, Parfums,
Royce, 565 and Jackson National Life Insurance
Company.
14
ITEM TITLE EXHIBIT NO. DESCRIPTION
- ---------- ----------- -----------
Subsidiaries of Registrant 21.1 List of Subsidiaries.
Consents of Experts and Counsel 23.1 Consent of KPMG LLP dated March 27, 2000.
27 Financial Data Schedule
- ------------------------
(a) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1995. The exhibit numbers in such Form 10-K are as
follows: Restated Certificate, Exhibit 1; and By-Laws, Exhibit 2.
(b) This exhibit was filed as an exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1996. The exhibit number in such Form 10-Q is
Exhibit 1.
(c) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1994. The exhibit numbers in such Form 10-K are as
follows: Employee Pension Plan, Exhibit 2; Amendment No. 2 to Employee's
Stock Ownership Plan, Exhibit 3; Loan Agreement with Dan K. Wassong,
Exhibit 4; 401(k) Plan, Exhibit 5; Supplemental Executive Retirement Plan,
Exhibit 6.
(d) This exhibit was filed as an exhibit to the Registrant's Form 10-K for the
year ended December 31, 1989. The exhibit number in such Form 10-K is
Exhibit 2.
(e) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1993. The exhibit numbers in such Form 10-K are as
follows: Amendment No. 1 to Employee's Stock Ownership Plan, Exhibit 2; 1984
Stock Option Plan, Exhibit 3; Loan Agreement with Dan K. Wassong dated
August 22, 1984, Exhibit 4; Employment Agreement with Charles J. Hinkaty,
Exhibit 5; Employment Agreement with Harvey P. Alstodt, Exhibit 6;
Employment Agreement with William H. McMenemy, Exhibit 7; Life Insurance
Agreement with Robert H. Haines, as trustee, Exhibit 9.
(f) These exhibits were filed as exhibits to the Registrant's Definitive Proxy
Statement dated May 27, 1999, relating to the Registrant's 1999 Annual
Meeting of Stockholders. The exhibit numbers in such Proxy Statement are as
follows: 1994 Stock Plan, as amended and restated, Exhibit A; Annual
Incentive Plan, as amended and restated, Exhibit B.
(g) This exhibit was filed on April 1, 1991, as an exhibit to the Registrant's
Form 10-K for the year ended December 31, 1990. The exhibit number in such
Form 10-K is Exhibit 2.
(h) These exhibits were filed as exhibits to the Registrant's Form 10-Q for the
quarter ended September 30, 1997. The exhibit numbers in such Form 10-Q are
as follows: Lease between Registrant and Coliseum Towers Associates,
Exhibit 10.1; Purchase Money Promissory Note with Carver Boat Corporation,
Exhibit 10.2.
(i) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1996, as follows: 10.9 above was filed as Exhibit 1
to the 1996 10-K; 10.19 above was filed as Exhibit 2 to the 1996 10-K; 10.21
above was filed as Exhibit 3 to the 1996 10-K; and 10.24 above was filed as
Exhibit 4 to the 1996 10-K.
(j) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1998, as follows: 10.10 above was filed as
Exhibit 10.32 to the 1998 10-K; 10.25 above as filed as Exhibit 10.29 to the
1998 10-K; 10.26 above was filed as Exhibit 10.30 to the 1998 10-K; and
10.27 above was filed as Exhibit 10.31 to the 1998 10-K.
15
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DEL LABORATORIES, INC.
(REGISTRANT)
By /s/ DAN K. WASSONG
----------------------------------------------
Dan K. Wassong
CHAIRMAN, PRESIDENT & CHIEF EXECUTIVE OFFICER
March 23, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed by the following persons on behalf of the Registrant
in the capacities and on the dates indicated.
Chairman, President & Chief
By /s/ DAN K. WASSONG Executive Officer
-------------------------------------- (Principal Executive March 23, 2000
Dan K. Wassong Officer)
By /s/ CHARLES HINKATY
-------------------------------------- Director, Vice President March 23, 2000
Charles Hinkaty
By /s/ MARTIN E. REVSON
-------------------------------------- Director March 23, 2000
Martin E. Revson
By /s/ JACK FUTTERMAN
-------------------------------------- Director March 23, 2000
Jack Futterman
By /s/ ROBERT A. KAVESH
-------------------------------------- Director March 23, 2000
Robert A. Kavesh
By /s/ STEVEN KOTLER
-------------------------------------- Director March 23, 2000
Steven Kotler
By /s/ GEORGE LINDEMANN
-------------------------------------- Director March 23, 2000
George Lindemann
By /s/ MARCELLA MAXWELL
-------------------------------------- Director March 23, 2000
Marcella Maxwell
By /s/ ENZO J. VIALARDI
-------------------------------------- Executive Vice President, March 23, 2000
Enzo J. Vialardi Chief Financial Officer
16
DEL LABORATORIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Independent Auditors' Report................................ F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
1998.................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997........................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997........................ F-5
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1999, 1998 and 1997............ F-6
Notes to Consolidated Financial Statements................ F-7
Schedule:
II Valuation and Qualifying Accounts for the years ended
December 31, 1999, 1998 and 1997........................ F-27
All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.
F-1
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Del Laboratories, Inc.:
We have audited the accompanying consolidated balance sheets of Del
Laboratories, Inc. and subsidiaries (the Company) as of December 31, 1999 and
1998, and the related consolidated statements of operations, shareholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1999. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule as listed in
the accompanying index. These consolidated financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Del
Laboratories, Inc. and subsidiaries at December 31, 1999 and 1998, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
/s/ KPMG LLP
Melville, New York
March 6, 2000
F-2
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND DECEMBER 31, 1998
ASSETS 1999 1998
- ------ ------------ ------------
Current assets:
Cash and cash equivalents................................. $ 3,585,294 $ 3,730,557
Accounts receivable--less allowance for doubtful accounts
of $1,300,000 in 1999 and 1998.......................... 45,941,959 47,115,818
Income taxes receivable................................... 1,962,448 --
Inventories............................................... 59,155,209 55,619,832
Deferred income taxes, net................................ 5,272,000 3,649,565
Prepaid expenses and other current assets................. 2,455,155 2,975,378
------------ ------------
Total current assets................................ 118,372,065 113,091,150
------------ ------------
Property, plant and equipment, at cost...................... 57,722,795 57,178,427
Less accumulated depreciation and amortization.............. (20,532,169) (19,263,190)
------------ ------------
Net property, plant and equipment......................... 37,190,626 37,915,237
Intangibles arising from acquisitions, net.................. 17,100,974 18,449,664
Other assets................................................ 7,896,911 8,017,854
------------ ------------
Total assets........................................ $180,560,576 $177,473,905
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------------------------------
Current liabilities:
Notes payable to bank..................................... $ -- $ 3,500,000
Current portion of long-term debt......................... 3,888,461 485,610
Accounts payable.......................................... 27,174,668 35,781,224
Accrued liabilities....................................... 12,836,531 10,023,943
Income taxes payable...................................... -- 572,109
------------ ------------
Total current liabilities........................... 43,899,660 50,362,886
Long-term pension liability, less current portion........... 9,051,757 7,895,044
Deferred income taxes, net.................................. 986,000 718,500
Long-term debt, less current portion........................ 75,750,000 59,400,401
------------ ------------
Total liabilities................................... 129,687,417 118,376,831
------------ ------------
Shareholders' equity:
Preferred stock $.01 par value, authorized 1,000,000
shares; no shares issued................................ -- --
Common stock $1 par value, authorized 20,000,000 shares;
issued 10,000,000 shares................................ 10,000,000 10,000,000
Additional paid-in capital................................ 126,899 1,850,617
Accumulated other comprehensive loss...................... (1,029,106) (1,465,750)
Retained earnings......................................... 75,136,416 81,203,670
------------ ------------
84,234,209 91,588,537
Less: Treasury stock at cost, 2,455,420 shares in 1999 and
2,340,639 shares in 1998................................ (32,119,800) (31,097,213)
Receivables for stock options exercised................... (1,241,250) (1,394,250)
------------ ------------
Total shareholders' equity.......................... 50,873,159 59,097,074
------------ ------------
Total liabilities and shareholders' equity.......... $180,560,576 $177,473,905
============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-3
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
------------ ------------ ------------
Net sales.......................................... $267,346,457 $274,861,637 $263,010,452
Cost of goods sold................................. 124,920,810 115,809,582 101,089,472
Selling and administrative expenses................ 145,050,663 136,158,135 136,668,570
------------ ------------ ------------
Operating income (loss).......................... (2,625,016) 22,893,920 25,252,410
Other income (expense):
Gains on sales of facility and land.............. 3,042,817 -- --
Interest expense................................. (5,961,276) (4,655,016) (3,998,057)
Interest income.................................. 60,456 222,040 623,287
------------ ------------ ------------
Earnings (loss) before income taxes................ (5,483,019) 18,460,944 21,877,640
Income taxes expense (benefit)..................... (1,481,000) 7,384,000 8,751,000
------------ ------------ ------------
Net earnings (loss).............................. (4,002,019) 11,076,944 13,126,640
============ ============ ============
Earnings (loss) per common share:
Basic............................................ $ (0.53) $ 1.43 $ 1.69
============ ============ ============
Diluted.......................................... $ (0.53) $ 1.34 $ 1.56
============ ============ ============
Weighted average common shares outstanding:
Basic............................................ 7,530,000 7,733,000 7,745,000
============ ============ ============
Diluted.......................................... 7,530,000 8,288,000 8,415,000
============ ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-4
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
1999 1998 1997
----------- ------------ ------------
Cash flows from operating activities:
Net earnings (loss)................................ $(4,002,019) $ 11,076,944 $ 13,126,640
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 7,353,450 6,393,597 5,819,437
Deferred income taxes............................ (1,354,935) (2,062,000) 269,125
Provision for doubtful accounts.................. 112,410 174,000 65,000
Gains on sales of land and facility.............. (3,042,817) -- --
Other non-cash operating items................... 679,248 (131,975) 67,679
Changes in operating assets and liabilities:
Accounts receivable............................ 953,608 (16,581,735) 8,511
Inventories.................................... (3,648,871) (6,718,080) (13,899,407)
Prepaid expenses and other current assets...... 520,223 (1,117,010) (54,611)
Other assets and other liabilities............. 1,338,444 1,326,292 (1,992,349)
Accounts payable............................... (7,639,603) 6,966,581 11,109,182
Accrued liabilities............................ 2,812,588 (3,943,516) (927,171)
Income taxes, net.............................. (2,033,397) 2,088,944 4,259,815
----------- ------------ ------------
Net cash provided by (used in) operating
activities................................. (7,951,671) (2,527,958) 17,851,851
----------- ------------ ------------
Cash flows used in investing activities:
Proceeds from sales of land and facility........... 4,606,460 -- --
Additions to intangibles and other assets.......... (40,138) (11,964,598) --
Property, plant and equipment additions............ (7,288,175) (7,223,537) (10,827,246)
----------- ------------ ------------
Net cash used in investing activities........ (2,721,853) (19,188,135) (10,827,246)
----------- ------------ ------------
Cash flows provided by (used in) financing
activities:
Borrowings under long-term debt.................... 4,250,000 15,750,000 --
Principal payments under long-term debt............ (433,956) (487,076) (219,572)
Borrowings under short-term lines of credit........ 15,750,000 19,250,000 --
Repayments of short-term lines of credit........... (3,500,000) (15,750,000) --
Decrease in receivables for stock options
exercised........................................ 13,000 13,000 15,672
Exercise of stock options.......................... -- 38,203 264,507
Acquisition of treasury stock...................... (4,538,799) (7,323,295) (5,875,068)
Dividends paid..................................... (1,037,618) (996,911) (740,308)
Other financing activities......................... -- (4,434) --
----------- ------------ ------------
Net cash provided by (used in) financing
activities................................. 10,502,627 10,489,487 (6,554,769)
----------- ------------ ------------
Effect of exchange rate changes on cash.............. 25,634 (21,453) (7,167)
----------- ------------ ------------
Net increase (decrease) in cash and cash
equivalents........................................ (145,263) (11,248,059) 462,669
Cash and cash equivalents at beginning of year....... 3,730,557 14,978,616 14,515,947
----------- ------------ ------------
Cash and cash equivalents at end of period........... $ 3,585,294 $ 3,730,557 $ 14,978,616
=========== ============ ============
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONAL ACCUMULATED OTHER RECEIVABLES FOR
COMMON PAID-IN COMPREHENSIVE RETAINED TREASURY STOCK OPTIONS
STOCK CAPITAL INCOME EARNINGS STOCK EXERCISED
----------- ----------- ----------------- ----------- ------------ ---------------
Balances at December 31, 1996...... $ 8,784,514 $ 4,321,131 $ (547,028) $61,353,458 $(27,333,714) $(1,736,320)
Issuance of treasury stock upon
exercise of stock options
(354,586 shares)................. -- (592,898) -- -- 3,282,807 --
Purchase of treasury stock (282,171
shares).......................... -- -- -- -- (8,370,111) --
Income tax benefit arising from
stock options exercised.......... -- 3,118,206 -- -- -- --
Repayment of receivables........... -- -- -- -- -- 189,070
Dividends declared ($.14 per
share)........................... -- -- -- (793,915) -- --
Four-for-three stock split
(note 1(k))...................... 1,215,486 (6,147,439) -- (2,498,406) 7,430,359 --
Net earnings....................... -- -- -- 13,126,640 -- --
Foreign currency translation
adjustment....................... -- -- (272,118) -- -- --
Total comprehensive income....... -- -- -- -- -- --
----------- ----------- ----------- ----------- ------------ -----------
Balances at December 31, 1997...... 10,000,000 699,000 (819,146) 71,187,777 (24,990,659) (1,547,250)
Issuance of treasury stock upon
exercise of stock options
(247,012 shares)................. -- (1,178,537) -- -- 2,686,943 --
Purchase of treasury stock (362,027
shares).......................... -- -- -- (8,793,497) --
Income tax benefit arising from
stock options exercised.......... -- 2,334,588 -- -- -- --
Repayment of receivables........... -- -- -- -- -- 153,000
Dividends declared ($.14 per
share)........................... -- -- -- (1,061,051) -- --
Four-for-three stock split--cash in
lieu of fractional shares........ -- (4,434) -- -- -- --
Net earnings....................... -- -- -- 11,076,944 -- --
Foreign currency translation
adjustment....................... -- -- (540,742) -- -- --
Minimum pension liability
adjustment, net.................. -- -- (105,862) -- -- --
Total comprehensive income....... -- -- -- -- -- --
----------- ----------- ----------- ----------- ------------ -----------
Balances at December 31, 1998...... 10,000,000 1,850,617 (1,465,750) 81,203,670 (31,097,213) (1,394,250)
Issuance of treasury stock upon
exercise of stock options
(209,130 shares)................. -- (1,582,842) -- -- 2,608,140 --
Purchase of treasury stock (323,552
shares).......................... -- -- -- -- (5,564,097) --
Income tax benefit arising from
stock options exercised.......... -- 501,160 -- -- -- --
Repayment of receivables........... -- -- -- -- -- 153,000
Dividends declared ($.105 per
share)........................... -- -- -- (773,901) -- --
Stock dividend declared............ -- (642,036) -- (1,291,334) 1,933,370 --
Net loss........................... -- -- -- (4,002,019) -- --
Foreign currency translation
adjustment....................... -- -- 375,856 -- -- --
Minimum pension liability
adjustment, net.................. -- -- 60,788 -- -- --
Total comprehensive income....... -- -- -- -- -- --
----------- ----------- ----------- ----------- ------------ -----------
Balances at December 31, 1999...... $10,000,000 $ 126,899 $(1,029,106) $75,136,416 $(32,119,800) $(1,241,250)
=========== =========== =========== =========== ============ ===========
SHAREHOLDERS'
EQUITY
-------------
Balances at December 31, 1996...... $44,842,041
Issuance of treasury stock upon
exercise of stock options
(354,586 shares)................. 2,689,909
Purchase of treasury stock (282,171
shares).......................... (8,370,111)
Income tax benefit arising from
stock options exercised.......... 3,118,206
Repayment of receivables........... 189,070
Dividends declared ($.14 per
share)........................... (793,915)
Four-for-three stock split
(note 1(k))...................... --
Net earnings....................... --
Foreign currency translation
adjustment....................... --
Total comprehensive income....... 12,854,522
-----------
Balances at December 31, 1997...... 54,529,722
Issuance of treasury stock upon
exercise of stock options
(247,012 shares)................. 1,508,406
Purchase of treasury stock (362,027
shares).......................... (8,793,497)
Income tax benefit arising from
stock options exercised.......... 2,334,588
Repayment of receivables........... 153,000
Dividends declared ($.14 per
share)........................... (1,061,051)
Four-for-three stock split--cash in
lieu of fractional shares........ (4,434)
Net earnings....................... --
Foreign currency translation
adjustment....................... --
Minimum pension liability
adjustment, net.................. --
Total comprehensive income....... 10,430,340
-----------
Balances at December 31, 1998...... 59,097,074
Issuance of treasury stock upon
exercise of stock options
(209,130 shares)................. 1,025,298
Purchase of treasury stock (323,552
shares).......................... (5,564,097)
Income tax benefit arising from
stock options exercised.......... 501,160
Repayment of receivables........... 153,000
Dividends declared ($.105 per
share)........................... (773,901)
Stock dividend declared............ --
Net loss........................... --
Foreign currency translation
adjustment....................... --
Minimum pension liability
adjustment, net.................. --
Total comprehensive income....... (3,565,375)
-----------
Balances at December 31, 1999...... $50,873,159
===========
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
Del Laboratories, Inc. and subsidiaries (the Company) is a manufacturer and
distributor of cosmetics and proprietary pharmaceuticals. The principal products
in the cosmetics segment are nail care, nail color, color cosmetics, beauty
implements, bleaches and depilatories, personal care products and other related
cosmetic items. The principal products in the pharmaceutical segment are of a
proprietary nature and range from oral analgesics to acne treatment products and
first aid products.
(B) PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts of
all wholly-owned domestic and foreign subsidiaries. The net assets and results
of foreign operations are not significant to the consolidated financial
statements. The accounts of foreign subsidiaries are translated in accordance
with the provisions of Statement of Financial Accounting Standards (SFAS)
No. 52, "Foreign Currency Translation." As such, balance sheet accounts are
translated at the exchange rate as of December 31 of each year and income
statement accounts are translated at average exchange rates during the period.
The resulting translation adjustments are recorded as a component of
shareholders' equity. Gains or losses resulting from foreign currency
transactions are included in other income. All intercompany accounts and
transactions have been eliminated in consolidation.
(C) CASH AND CASH EQUIVALENTS
Cash and cash equivalents include deposits in banks, short term commercial
paper, United States Treasury bills and money market funds with an initial term
of less than three months. Cash equivalents were $150,000 and $695,000 as of
December 31, 1999 and 1998, respectively. For purposes of the consolidated
statements of cash flows, the Company considers all highly liquid debt
instruments with original maturities of three months or less to be cash
equivalents.
(D) REVENUE RECOGNITION
The Company sells its products to chain drug stores, mass volume retailers,
supermarkets and wholesalers. Sales of such products are principally denominated
in U.S. dollars. The Company's accounts receivable reflect the granting of
credit to these customers. Revenues are recognized and product discounts are
recorded when merchandise is shipped. Net sales are comprised of gross revenues
less returns, trade discounts and customer allowances. Merchandise returns are
accrued at the earlier of customer deduction or receipt of goods. Net sales are
reduced for the net impact of expected returns. The Company generally grants
credit based upon analysis of the customer's financial position and previously
established buying and selling patterns.
F-7
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
(E) INVENTORIES
Inventories are valued at the lower of cost (principally first-in/first-out)
or market value. The components of inventories are as follows:
1999 1998
----------- -----------
Raw materials...................................... 27,936,005 $26,911,795
Work in process.................................... 6,225,866 6,247,489
Finished goods..................................... 24,993,338 22,460,548
----------- -----------
$59,155,209 $55,619,832
=========== ===========
Included in cost of sales for 1999 is an increase in the inventory valuation
reserve for $4,500,000 to reflect the estimated market value of the Naturistics
inventory pursuant to the Company's plan to reduce excess and slow moving
inventory of this brand.
(F) PROPERTY, PLANT AND EQUIPMENT
The Company provides for depreciation on the straight-line method over the
estimated useful lives of the assets. The range of estimated lives applicable to
the assets are as follows:
Building and building improvements.......................... 10 to 50 years
Machinery and equipment..................................... 3 to 15 years
Furniture and fixtures...................................... 3 to 10 years
(G) INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
(H) RESEARCH AND DEVELOPMENT
The Company has expended $5,219,000, $4,927,000 and $5,038,000 during 1999,
1998 and 1997, respectively, for research and development relating to the
development of new products, clinical and regulatory affairs, and quality
control/assurance of the Company's product lines. All costs associated with
research and development are expensed as incurred and included in selling and
administrative expenses in the accompanying consolidated statements of
operations.
(I) ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expenses were
approximately $29,000,000, $31,000,000 and $33,000,000 in 1999, 1998 and 1997,
respectively.
F-8
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
(J) EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income available to
common shareholders (which for the Company equals its recorded net income
(loss)) by the weighted average number of common shares outstanding during the
period. Diluted earnings per share reflects the potential dilution that could
occur if securities or other contracts to issue common stock, such as stock
options, were exercised, converted into common stock or otherwise resulted in
the issuance of common stock.
(K) STOCK SPLITS AND DIVIDENDS
On November 15, 1999, the Company's Board of Directors approved a 2% stock
dividend. As a result, 147,581 shares of treasury stock were issued on
December 28, 1999 to shareholders of record on November 30, 1999. Accordingly,
the effect of the 2% stock dividend has been reflected in the consolidated
balance sheets as of December 31, 1999 and 1998, and the consolidated statements
of shareholders' equity for 1999, 1998 and 1997.
On February 6, 1998, the Company's Board of Directors approved a
four-for-three common stock split to be distributed in the form of a stock
dividend. As a result, 1,908,377 shares were issued on March 10, 1998 to
shareholders of record on February 20, 1998, of which 692,891 shares represented
treasury stock of the Company. Accordingly, the effect of the four-for-three
stock split has been reflected on the consolidated balance sheet and
consolidated statement of shareholders' equity as of December 31, 1997. In
addition, all references to number of shares, per share amounts and stock option
data, excluding share and per share amounts reflected on the consolidated
statement of shareholders' equity for the year ended December 31, 1997, have
been restated. In connection with the stock dividend, treasury stock was reduced
by $7,430,359, with a corresponding reduction in retained earnings of $2,498,406
and a reduction in additional paid-in-capital of $6,147,439 as of December 31,
1997.
(L) STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees", and related interpretations, in accounting for
its fixed plan stock options. As such, compensation expense would be recorded on
the date of grant only if the current market price of the underlying stock
exceeded the exercise price.
(M) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company accounts for long-lived assets in accordance with the provisions
of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of". This Statement requires that long-lived
assets and certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amounts of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered
to be impaired, the impairment to be recognized is measured by the amount by
which the carrying amount of the assets exceed the fair value of the assets.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
F-9
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(1) SUMMARY OF ACCOUNTING POLICIES (CONTINUED)
The recoverability of the excess cost over fair value of assets acquired is
assessed by determining whether the amortization over its remaining life can be
recovered through undiscounted future operating cash flows of the acquired
operation. The amount of impairment, if any, is measured based on projected
discounted future operating cash flows using a discount rate reflecting the
Company's average cost of funds. The assessment of the recoverability of the
excess cost over fair value of assets acquired will be impacted if estimated
future operating cash flows are not achieved.
(N) RECLASSIFICATIONS
Certain reclassifications were made to prior year amounts to conform with
the 1999 presentation.
(O) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from those estimates.
(2) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated
statements of cash flows:
1999 1998 1997
---------- ---------- ----------
Cash transactions:
Interest................................................. $6,026,000 $4,591,000 $3,805,000
========== ========== ==========
Income taxes............................................. $1,938,000 $7,630,000 $4,171,000
========== ========== ==========
Non-cash transactions:
Income tax benefit arising from stock options
exercised.............................................. $ 501,000 $2,335,000 $3,118,000
========== ========== ==========
Purchase of North Carolina property...................... -- -- $4,403,000
========== ========== ==========
Shares tendered to exercise stock options................ $1,025,000 $1,470,000 $2,495,000
========== ========== ==========
(3) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment, at cost, are as follows:
1999 1998
----------- -----------
Land............................................... $ 1,916,151 $ 2,829,295
Building and building improvements................. 16,472,792 17,175,319
Machinery and equipment............................ 32,318,533 30,031,476
Furniture and fixtures............................. 7,015,319 7,142,337
----------- -----------
$57,722,795 $57,178,427
=========== ===========
Depreciation expense for 1999, 1998 and 1997 was $6,446,523, $5,700,053 and
$5,466,462, respectively.
F-10
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) INTANGIBLES ARISING FROM ACQUISITIONS
Intangibles represent the excess of the purchase prices paid for companies
and product lines over amounts assigned to fair value of the net tangible
assets. Total intangibles related to acquisitions prior to 1971 amount to
$6,660,000, of which $378,000 was written off in 1995 due to a diminution in
value. The remaining $6,282,000 has been determined to be recoverable under the
provisions of SFAS No. 121, therefore, no amortization has been provided for
this amount. The portion of intangibles, $3,350,000, acquired in 1980,
attributable to Propa pH, had been amortized using the straight-line method over
30 years. In 1996, the Company reduced the carrying value of goodwill associated
with the Propa pH brand by $500,000, which is included in amortization expense,
and accelerated amortization of the remaining net book value ($1,015,000 at
December 31, 1996) over a five-year period. The trademarks acquired in 1984,
$3,000,000, are being amortized using the straight-line method over 20 years. In
1998, the Company acquired the intellectual property rights and other assets of
the Corn Silk brand of facial make-up for approximately $10.9 million and
$1.0 million in cash, respectively. The intellectual property rights are being
amortized over 20 years. In September 1999, the Company entered into an
agreement with the former owner of CornSilk, related to its 1998 acquisition of
the CornSilk brand of facial make-up. Under the provisions of this agreement
adjustments to the original purchase price were negotiated. As a result, the
intangible assets arising from this acquisition were reduced by approximately
$482,000.
Accumulated amortization amounted to $6,466,700, $5,559,773 and $4,866,229
at December 31, 1999, 1998 and 1997, respectively. Amortization expense amounted
to $906,927, $693,544 and $352,975 for 1999, 1998 and 1997, respectively.
(5) INCOME TAXES
The components of income tax expense (benefit) are as follows:
FEDERAL STATE FOREIGN TOTAL
----------- ---------- -------- -----------
1999
Current tax................................. $ (421,000) $ 102,000 $193,000 $ (126,000)
Deferred tax................................ (1,199,000) (156,000) -- (1,355,000)
----------- ---------- -------- -----------
$(1,620,000) $ (54,000) $193,000 $(1,481,000)
=========== ========== ======== ===========
1998
Current tax................................. $ 8,107,000 $1,011,000 $328,000 $ 9,446,000
Deferred tax................................ (1,780,000) (282,000) -- (2,062,000)
----------- ---------- -------- -----------
$ 6,327,000 $ 729,000 $328,000 7,384,000
=========== ========== ======== ===========
1997
Current tax................................. $ 7,206,000 $ 988,000 $288,000 $ 8,482,000
Deferred tax................................ 241,000 28,000 -- 269,000
----------- ---------- -------- -----------
$ 7,447,000 $1,016,000 $288,000 8,751,000
=========== ========== ======== ===========
F-11
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
Total income tax expense (benefit) differed from the statutory United States
Federal income tax rate of 35% for 1999, 1998 and 1997 of earnings before income
taxes as a result of the following items:
1999 1998 1997
----------- ---------- ----------
Tax provision at statutory rate.......................... $(1,919,000) $6,461,000 $7,658,000
Increases (decreases) in taxes resulting from:
State income taxes, net of Federal income tax
benefit.............................................. (35,000) 474,000 661,000
Amortization of intangibles............................ 124,000 124,000 124,000
Officers life Insurance................................ 86,000 82,000 60,000
Meals and entertainment................................ 114,000 102,000 104,000
Other, net............................................. 149,000 141,000 144,000
----------- ---------- ----------
Actual provision (benefit) for income taxes.............. $(1,481,000) $7,384,000 $8,751,000
=========== ========== ==========
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. For presentation
purposes, certain of such tax assets and liabilities are shown net on the
accompanying balance sheets. Significant components of the Company's deferred
tax assets and liabilities as of December 31, are as follows:
1999 1998
----------- -----------
Deferred tax assets:
Accounts receivable, principally due to allowance for
doubtful accounts....................................... $ 315,000 $ 470,000
Supplemental Executive Retirement Plan (SERP) expense,
principally due to accrual for financial statement
purposes................................................ 1,540,000 1,291,000
Inventory, principally due to reserves.................... 3,969,000 2,442,000
Pension accrual for financial reporting purposes.......... 1,461,000 1,233,000
Sales discounts and returns, coupon redemptions and
other................................................... 1,190,000 1,043,000
----------- -----------
Total gross deferred tax assets............................. 8,475,000 6,479,000
Less valuation allowance.................................... -- --
----------- -----------
Deferred tax assets......................................... 8,475,000 6,479,000
Deferred tax liabilities:
Property, plant and equipment, principally due to
differences in depreciation methods..................... (3,987,000) (3,243,000)
Other..................................................... (202,000) (305,000)
----------- -----------
Deferred tax liabilities.................................... (4,189,000) (3,548,000)
----------- -----------
Net deferred tax assets..................................... $ 4,286,000 $ 2,931,000
=========== ===========
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers the
scheduled reversal of deferred tax liabilities, projected future taxable income,
and tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over the
F-12
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) INCOME TAXES (CONTINUED)
periods which the deferred tax assets are deductible, management believes it is
more likely than not the Company will realize the benefits of these deductible
differences.
(6) LONG-TERM DEBT
1999 1998
----------- -----------
9.5% senior notes.................................. $40,000,000 $40,000,000
Notes payable under lines of credit................ 15,750,000 --
Notes payable under revolving credit agreement..... 20,000,000 15,750,000
Purchase money promissory note..................... 3,888,461 4,136,011
----------- -----------
$79,638,461 $59,886,011
Less current portion............................... 3,888,461 485,610
----------- -----------
$75,750,000 $59,400,401
=========== ===========
On February 25, 2000, the senior notes were amended and restated primarily
to reduce the $8,000,000 principal repayments due on May 31, 2001 and May 31,
2002. The amended notes require annual principal repayments of $4,000,000 on
May 31, 2001 and May 31, 2002; $8,000,000 on May 31, 2003 and May 31, 2004 and
the balance on May 31, 2005. The terms of the amended agreement include
covenants, which provide among other things, for the maintenance of financial
covenants and ratios relating to consolidated net worth, restrictions on cash
dividends, the purchase of treasury stock, and certain other expenditures.
On February 25, 2000, the Company amended the revolving credit agreement
entered into in December 1998. The amendment increased the facility to
$47,500,000 from $20,000,000 and extended the expiration to February 25, 2003.
After giving effect to the refinancing of the lines of credit (note 7), this
amended revolving credit agreement increased the Company's borrowing capacity by
$10,000,000. Under the terms of the agreement, interest rates on borrowings are
based on, at the Company's option, LIBOR, prime or federal funds rates. The
terms of the agreement include a commitment fee based on unutilized amounts, an
annual agency fee and covenants which provide among other things, for the
maintenance of financial covenants and ratios relating to consolidated net
worth, restrictions on cash dividends, the purchase of treasury stock, and
certain other expenditures. The revolving credit facility, as amended, is
collateralized by the Company's trademarks and accounts receivable until such
time as the borrowings under the revolving credit agreement are less than
$22,500,000 and a certain financial ratio is achieved. The senior note holder
and the lenders under the revolving credit agreement have entered into an
intercreditor agreement which includes the pro rata sharing of such collateral.
No compensating balances are required. The weighted-average interest rate at
December 31, 1999 was 9.06%.
In conjunction with the 1997 purchase of land and buildings in North
Carolina, the Company issued a non-interest bearing purchase money promissory
note to the seller of the property for $5,225,000 which is collateralized by the
land and buildings in North Carolina. The Company recorded the note payable at
its present value using an interest rate of 7.3%, which approximated the
Company's incremental borrowing rate. Interest expense is being recognized over
the term of the note based upon the effective yield method. The final payment of
$3,850,000 is due on May 15, 2000. The Company is currently in the process of
refinancing this note through a new mortgage on the land and buildings with a
different lender.
F-13
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) LONG-TERM DEBT (CONTINUED)
The aggregate maturities of long-term debt for each of the five years
subsequent to December 31, 1999, including amounts outstanding under the amended
revolving credit agreement, are as follows: 2000, $3,888,461; 2001, $8,000,000;
2002, $8,000,000; 2003, $35,750,000; and 2004, $8,000,000.
(7) FINANCING ARRANGEMENTS
At December 31, 1999 and 1998, the Company had arrangements with banks
providing for $17,500,000 of lines of credit. These lines were renewable
annually. Borrowings under these lines at December 31, 1999 and 1998 were
$15,750,000 and $3,500,000, respectively. On February 25, 2000, the lines were
cancelled and refinanced (note 6) as part of the amended and restated revolving
credit facility and therefore have been classified as long-term debt in the
accompanying consolidated balance sheet as of December 31, 1999.
(8) EMPLOYEE RETIREMENT PLANS
(A) PENSION PLANS
The Company maintains two non-contributory defined benefit pension plans
covering all U.S. eligible employees. The Del Non-Union Plan formula is based on
years of service and the employee's compensation during the five years before
retirement. The Del LaCross Union Plan formula is based on years of service. The
Company made contributions to these plans of $166,000, $519,000 and $606,000 for
the years 1999, 1998 and 1997. 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 plan assets of
the SERP, which were approximately $2,333,000 and $2,105,000 as of December 31,
1999 and 1998, are considered assets of the Company and, as such, are included
in other assets on the accompanying consolidated balance sheets. The assets of
the SERP, which consist of cash and cash equivalents and U.S. government bonds,
are held-to-maturity securities and, as such, are carried at cost plus accrued
interest. The Company did not contribute to the SERP in 1999; a contribution of
$265,000 and $750,000 was made in 1998 and 1997, respectively.
Total pension expense for the years ended December 31, 1999, 1998 and 1997
amounted to approximately $1,696,000, $1,736,000 and $1,826,000, respectively.
The change in benefit obligation, change in plan assets and funded status as of
December 31, 1999 and 1998 and components of net periodic cost for 1999, 1998
and 1997 of the Company's domestic plans are set forth in the following tables:
F-14
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE RETIREMENT PLANS (CONTINUED)
1999
---------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
----------- ----------- -----------
Change in benefit obligation:
Benefit obligation at the beginning of the year....... $16,394,731 $1,109,657 $ 5,047,886
Service cost.......................................... 1,131,964 24,396 56,629
Interest cost......................................... 1,087,135 72,145 340,732
Actuarial (gain) loss................................. (2,800,609) (137,774) 10,482
Benefits paid......................................... (540,000) (60,000) (7,790)
----------- ---------- -----------
Benefit obligation at the end of the year............. $15,273,221 $1,008,424 $ 5,447,939
----------- ---------- -----------
Change in plan assets:
Fair value of assets at the beginning of the year..... $14,571,545 $ 519,036 $ --
Actual return on plan assets.......................... 1,137,624 27,117 --
Employer contributions................................ 20,000 146,000 --
Benefits paid......................................... (796,203) (70,621) --
----------- ---------- -----------
Fair value of assets at the end of the year........... $14,932,966 $ 621,532 $ --
----------- ---------- -----------
Funded status........................................... $ (340,255) $ (386,892) $(5,447,939)
Unrecognized transition (assets) obligation............. (189,665) 49,553 --
Unamortized prior service cost.......................... 373,571 43,565 1,561,433
Unrecognized net actuarial (gain) loss.................. (3,303,186) 72,074 94,746
----------- ---------- -----------
Net amount recognized................................... $(3,459,535) $ (221,700) $(3,791,760)
=========== ========== ===========
Amounts recognized in the balance sheet consist of:
Accrued benefit liability............................. $(3,459,535) $ (386,892) $(5,302,833)
Intangible assets (included in other long-term
assets)............................................. -- 93,118 1,511,073
Accumulated other comprehensive income................ -- 72,074 --
----------- ---------- -----------
Net amount recognized................................... $(3,459,535) $ (221,700) $(3,791,760)
=========== ========== ===========
F-15
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE RETIREMENT PLANS (CONTINUED)
1998
---------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
----------- ----------- -----------
Change in benefit obligation:
Benefit obligation at the beginning of the year....... $14,271,480 $1,044,667 $ 3,475,818
Service cost.......................................... 963,336 21,418 49,694
Interest cost......................................... 996,031 71,603 316,291
Plan amendments....................................... -- 9,786 938,546
Actuarial loss........................................ 729,738 21,816 275,327
Benefits paid......................................... (565,854) (59,633) (7,790)
----------- ---------- -----------
Benefit obligation at the end of the year............. $16,394,731 $1,109,657 $ 5,047,886
----------- ---------- -----------
Change in plan assets:
Fair value of assets at the beginning of the year..... $12,190,109 $ 508,921 $ --
Actual return on plan assets.......................... 2,478,540 19,748 --
Employer contributions................................ 468,750 50,000 --
Benefits paid......................................... (565,854) (59,633) --
----------- ---------- -----------
Fair value of assets at the end of the year........... $14,571,545 $ 519,036 $ --
----------- ---------- -----------
Funded status........................................... $(1,823,186) $ (590,621) $(5,047,886)
Unrecognized transition (assets) obligation............. (252,241) 74,329 --
Unamortized prior service cost.......................... 429,727 53,233 1,826,539
Unrecognized net actuarial (gain) loss.................. (908,745) 168,862 119,813
----------- ---------- -----------
Net amount recognized................................... $(2,554,445) $ (294,197) $(3,101,534)
=========== ========== ===========
Amounts recognized in the balance sheet consist of:
Accrued benefit liability............................. $(2,554,445) $ (590,621) $(4,912,188)
Intangible assets..................................... -- 127,562 1,810,654
Accumulated other comprehensive income................ -- 168,862 --
----------- ---------- -----------
Net amount recognized................................... $(2,554,445) $ (294,197) $(3,101,534)
=========== ========== ===========
1999
------------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
----------- ----------- --------
Components of net periodic cost:
Service cost............................................ $ 1,131,964 $ 24,396 $ 56,629
Interest cost........................................... 1,087,135 72,145 340,732
Expected return on plan assets.......................... (1,287,589) (47,298) --
Amortization of unrecognized transition (assets)
obligations........................................... (62,576) 24,776 --
Recognized prior service cost........................... 56,156 9,668 265,106
Recognized net losses................................... -- 4,816 19,969
----------- -------- --------
Net periodic cost....................................... $ 925,090 $ 88,503 $682,436
=========== ======== ========
F-16
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE RETIREMENT PLANS (CONTINUED)
1998
-----------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
---------- ----------- --------
Components of net periodic cost:
Service cost.............................................. $963,336 $21,418 $ 48,767
Interest cost............................................. 996,031 71,603 327,482
Expected return on plan assets............................ (968,889) (39,994) --
Amortization of unrecognized transition (assets)
obligations............................................. (62,576) 24,776 --
Recognized prior service cost............................. 56,156 10,185 265,106
Recognized net losses..................................... -- 1,817 20,769
-------- ------- --------
Net periodic cost......................................... $984,058 $89,805 $662,124
======== ======= ========
1997
-----------------------------------
DEL NON- DEL LACROSS
UNION PLAN UNION PLAN SERP
---------- ----------- --------
Components of net periodic cost:
Service cost............................................. $1,020,529 $ 22,419 $ 53,381
Interest cost............................................ 888,092 70,859 207,823
Expected return on plan assets........................... (828,793) (40,069) --
Amortization of unrecognized transition (assets)
obligations............................................ (62,576) 24,776 --
Recognized prior service cost............................ 56,156 9,206 171,251
Recognized net losses.................................... 191,386 20,789 20,769
---------- -------- --------
Net periodic cost........................................ $1,264,794 $107,980 $453,224
========== ======== ========
The weighted-average actuarial assumptions used as of December 31, 1999,
1998 and 1997 were:
1999 1998 1997
-------- -------- --------
Discount rates.............................................. 8.00% 6.75% 7.00%
Rate of compensation increase............................... 5.50% 5.50% 5.50%
Expected long-term rate of return on plan assets............ 9.00% 9.00% 8.00%
The Company contributes to a multi-employer pension plan for the benefit of
its union employees. This plan is a defined benefit plan based on years of
service and the costs recognized for 1999, 1998 and 1997 were approximately
$463,000, $430,000 and $447,000, respectively.
The Company maintains a defined contribution plan for the benefit of its
Canadian employees. The costs recognized for 1999, 1998 and 1997 were
approximately $72,000, $60,000 and $57,000 in U.S. dollars, respectively.
(B) EMPLOYEE STOCK OWNERSHIP PLAN
The Company has an employee stock ownership plan and related trust, covering
substantially all full-time non-union employees. Under the terms of the plan,
the Company may make contributions to the trust in cash, shares of Company stock
or other property in amounts as may be determined by the Board of Directors. The
Board of Directors authorized contributions of $525,000 for 1997. Contributions
were not made for 1999 or 1998. At December 31, 1999 the trust held 481,000
shares of Company common stock.
F-17
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) EMPLOYEE RETIREMENT PLANS (CONTINUED)
(C) EMPLOYEE 401(K) SAVINGS PLAN
The Company maintains an Employee 401(k) Savings Plan. The plan is a defined
contribution plan which is administered by the Company. All regular, full-time
employees are eligible for voluntary participation upon completing six months of
service and having attained the age of twenty-one. The plan provides for growth
in savings through contributions and income from investments. It is subject to
the provisions of the Employee Retirement Income Security Act of 1974 (ERISA),
as amended. Plan participants are allowed to contribute a specified percentage
of their base salary. However, the Company retains the right to make optional
contributions for any plan year. Optional contributions were not made in 1999,
1998 and 1997.
(9) SHAREHOLDERS' EQUITY
(A) STOCK OPTION PLANS
The 1994 Stock Plan, as amended (the 1994 Plan) provides for the granting of
incentive and non-incentive options and other stock-based awards. A total of
1,921,978 shares have been authorized for issuance under the 1994 Plan. At
December 31, 1999, non-incentive options have been the only awards issued under
the 1994 Plan. The exercise price of options granted under the 1994 Plan shall
not be less than the fair market value of the common stock at the date of the
grant. The Compensation Committee of the Board of Directors (the Committee)
determines the persons to whom options will be granted, the prices at which
options may be exercised, the vesting period and whether the options will be
incentive or non-incentive. Incentive options, if granted, are exercisable for a
period of up to ten years from the date of the grant. The exercise price of the
shares to be purchased shall be paid either in cash, delivery (i.e., surrender)
of shares of common stock owned by the optionee at the time of exercise of the
option, in installments payable in cash if permitted by the Committee or in any
combination of the foregoing.
Shares received by an optionee upon exercise of a non-incentive option may
not be sold or otherwise disposed of for a period (restricted period) determined
by the Committee upon grant of the option, which shall be not less than six
months or more than three years from the date of the exercise, during which
period the Company is entitled, in the event the employment of the optionee with
the Company terminates, to repurchase the shares at the exercise price.
Following the restricted period, the Company shall have a right of first refusal
to purchase the shares at fair market value. Shares issuable upon exercise of
options granted to date under the 1994 Plan are subject to a six month
restricted period. At December 31, 1999, 981,117 of the 1,356,869 options
outstanding were exercisable under the 1994 Plan, at a weighted-average exercise
price of $14.94.
The 1984 Stock Option Plan, as amended (the 1984 Plan), provided for the
granting of incentive and non-incentive options to purchase shares of the
Company's common stock at prices which are not less than the fair market value
of the common stock at the dates of grant. Options are exercisable as determined
by the Committee for a period up to ten years and one day from the date of
grant. Incentive options granted to a 10% stockholder must be granted at 110% of
fair market value and may be exercised up to five years from the date of grant.
Payment of the exercise price of options may be made in the same manner as
provided by the 1994 Plan, and shares issued upon exercise are subject to a
restricted period similar to that provided under the 1994 Plan. At December 31,
1999, all 316,115 options outstanding under the 1984 Plan were exercisable at a
weighted-average exercise price of $5.22. No further options will be granted
under the 1984 Plan.
F-18
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (CONTINUED)
Limited stock appreciation rights also may be granted under the 1994 Plan
and 1984 Plan, which will be effective only upon a change in control of the
Company (as defined). These plans also accelerate the exercisability of all
unexercised options or stock appreciation rights immediately in the event of a
change in control of the Company.
Shares outstanding, option prices and option transactions during the last
three years, are summarized below:
1994 STOCK PLAN
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding December 31, 1996...................... 966,207 $12.37
Granted.......................................... 309,750 23.30
Exercised........................................ (81,917) 9.62
Forfeited........................................ (88,579) 18.03
---------
Outstanding December 31, 1997...................... 1,105,461 15.18
Granted.......................................... 198,961 23.98
Exercised........................................ (28,830) 13.77
Forfeited........................................ (27,874) 25.97
---------
Outstanding December 31, 1998...................... 1,247,718 16.38
Granted.......................................... 174,454 13.88
Exercised........................................ (27,650) 6.96
Forfeited........................................ (37,653) 22.36
---------
Outstanding December 31, 1999...................... 1,356,869 $16.08
=========
1984 STOCK OPTION PLAN
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Outstanding December 31, 1996...................... 1,106,642 $4.97
Granted.......................................... -- --
Exercised........................................ (390,864) 4.87
Forfeited........................................ -- --
---------
Outstanding December 31, 1997...................... 715,778 5.02
Granted.......................................... -- --
Exercised........................................ (218,181) 5.09
Forfeited........................................ (3) 4.58
---------
Outstanding December 31, 1998...................... 497,594 4.99
Granted.......................................... -- --
Exercised........................................ (181,479) 4.59
Forfeited........................................ -- --
---------
Outstanding December 31, 1999...................... 316,115 $5.22
=========
F-19
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (CONTINUED)
At December 31, 1999, a total of 1,672,984 shares of common stock were
subject to outstanding options under all stock option plans.
The Company applies APB Opinion No. 25 and interpretations in accounting for
stock option plans. 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", the Company's net earnings and net earnings per share would have
been reduced. The pro forma amounts are indicated below:
YEAR ENDED DECEMBER 31 1999 1998 1997
- ---------------------- ----------- ----------- -----------
Net earnings (loss)
As reported.......................................... $(4,002,000) $11,077,000 $13,127,000
Pro forma............................................ $(5,065,000) $10,076,000 $12,488,000
Basic net earnings (loss) per share
As reported.......................................... $ (0.53) $ 1.43 $ 1.69
Pro forma............................................ $ (0.67) $ 1.30 $ 1.61
Diluted net earnings (loss) per share
As reported.......................................... $ (0.53) $ 1.34 $ 1.56
Pro forma............................................ $ (0.67) $ 1.22 $ 1.48
The fair value of each option grant was estimated at the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for 1999, 1998 and 1997, respectively: dividend yields 1.01%, .58%,
and .46%; expected lives of 5.7,5.5 and 5.3 years; risk-free interest rates of
5.89%, 5.02% and 6.40%; and expected volatility of 42.2%, 39.0% and 26.6%. The
weighted-average fair value of options granted during 1999, 1998 and 1997 were
$6.15, $10.06 and $8.44, respectively.
The following table summarizes information about stock options at
December 31, 1999:
OUTSTANDING STOCK OPTIONS
----------------------------------------------- EXERCISABLE STOCK OPTIONS
WEIGHTED- ----------------------------
AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
REMAINING EXERCISE EXERCISE
RANGE OF EXERCISE PRICES SHARES CONTRACTUAL LIFE PRICE SHARES PRICE
------------------------ --------- ---------------- ---------------- --------- ----------------
$ 0.01 to $ 4.00............. 89,658 1.21 $ 2.99 89,658 $ 2.99
$ 4.01 to $ 8.00............. 306,698 2.64 $ 6.40 306,697 $ 6.40
$ 8.01 to $12.00............. 248,477 3.00 $11.25 232,549 $11.39
$12.01 to $16.00............. 596,030 4.88 $14.13 437,504 $14.05
$16.01 to $20.00............. 87,492 4.45 $18.25 56,466 $17.96
$20.01 to $24.00............. 161,257 4.78 $21.65 89,888 $21.67
$24.01 to $28.00............. 106,721 6.84 $25.04 38,218 $24.95
$28.01 to $32.00............. 76,651 5.87 $29.39 46,252 $29.46
--------- ---------
$ 0.01 to $32.00............. 1,672,984 4.13 $14.02 1,297,232 $12.57
========= =========
F-20
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(9) SHAREHOLDERS' EQUITY (CONTINUED)
(B) RECEIVABLES FOR STOCK OPTIONS EXERCISED
In 1984, the Company loaned an officer $367,000 in connection with the
payment of taxes arising from the exercise of stock options (the 1984 Loan). The
Company also loaned the officer $1,065,313 in 1988 (the 1988 Loan) and
$1,100,000 in 1990 (the 1990 Loan), each in connection with the exercise of
stock options and the tax liability arising therefrom. These loans were payable
in annual installments. In addition, the 1988 Loan and the 1990 Loan agreements
provided that, if the officer was employed by the Company at the time any
interest or debt payments were due, such payment would be forgiven.
Pursuant to an amendment to this officer's employment agreement, the 1984
Loan, the 1988 Loan and the 1990 Loan were consolidated, effective as of
July 1, 1999, with the aggregate principal balance to be repaid, with interest
at the rate of 6.0% per annum, in annual amounts of $140,000 for each year
during the period from 2000 through 2007 and a final payment of $82,250 on
January 20, 2008, provided that each payment of interest and principal will be
forgiven when due so long as the officer is then employed by, or then serves as
a consultant to the Company and, provided further, that the Company may (but is
not required to) forgive, during any year until 2007, in excess of $140,000 of
principal. Whenever the Company forgives any principal or interest owed by the
officer to the Company, the Company has agreed to pay to the officer such
additional payment (a "Gross-Up Payment") in an amount such that, after payment
by the officer of all federal, state and local taxes and excise taxes if any,
including any such taxes imposed on the Gross-Up Payment, the officer retains an
amount of the Gross-Up Payment equal to such taxes imposed on the principal and
interest forgiven. This loan must be secured by collateral with a fair value of
110% of the unpaid principal. The loan balance at December 31, 1999 was
$1,202,250 and was collateralized by 168,961 shares of the Company's common
stock.
During 1992, the Company loaned another officer $130,000 to enable him to
exercise an option for 9,719 shares. The loan bears interest at the prime rate
and is payable in quarterly installments. The loan balance at December 31, 1999
was $39,000 and was secured by a pledge of 8,500 shares of the Company's common
stock.
The balance of all loans made to officers is reflected as a reduction of
shareholders' equity in the accompanying consolidated financial statements.
(10) ACCRUED LIABILITIES
Accrued liabilities at December 31, 1999 and 1998 consisted of the
following:
1999 1998
----------- -----------
Salaries, wages, commissions & employee benefits... $ 1,829,365 $ 2,432,968
Interest........................................... 502,069 381,036
Advertising and promotion costs.................... 7,273,833 3,994,744
Other.............................................. 3,231,264 3,215,195
----------- -----------
$12,836,531 $10,023,943
=========== ===========
F-21
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(11) EARNINGS (LOSS) PER SHARE
A reconciliation between the numerators and denominators of the basic and
diluted income (loss) per common share is as follows:
1999 1998 1997
-------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net earnings (loss) (numerator)............................. $(4,002) $11,077 $13,127
------- ------- -------
Weighted-average common shares
(denominator for basic earnings (loss) per share)......... 7,530 7,733 7,745
Effect of dilutive securities:
Employee stock options.................................... -- 555 670
Weighted-average common and potential common shares
outstanding
(denominator for diluted earnings (loss) per share)....... 7,530 8,288 8,415
------- ------- -------
Basic earnings (loss) per share............................. $ (0.53) $ 1.43 $ 1.69
------- ------- -------
Diluted earnings (loss) per share........................... $ (0.53) $ 1.34 $ 1.56
------- ------- -------
Employee stock options for 1,673,000, 126,000 and 109,000 shares for 1999,
1998 and 1997, respectively, were not included in the net earnings (loss) per
share because their effect would have been anti-dilutive.
(12) COMMITMENTS AND CONTINGENCIES
In June 1997, the Company entered into a settlement agreement with respect
to a shareholders' derivative action against members of the Company's Board of
Directors in which, among other things, the Company's insurance carrier agreed
to pay $400,000 to the Company on behalf of the individual defendants, and the
Company paid $150,000 in connection with plaintiff's attorney's fees. The
stipulation of settlement expressly acknowledges that the settlement does not
constitute an admission by the defendants of any liability or wrongdoing by
them, but was entered into by the defendants to avoid the burden and costs of
further litigation.
The Company is involved in various other claims and legal actions arising in
the ordinary course of business, including environmental matters. The final
resolution of these matters on the Company's results of operations or liquidity
in a particular reporting period is not known. Management is of the opinion that
the ultimate disposition of these matters will not have a material adverse
effect on the Company's consolidated financial position.
The Company leases executive office space, furniture, data processing
equipment, transportation equipment and warehouse space under terms of leases
expiring through 2004. Rent expense under these
F-22
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES (CONTINUED)
operating leases aggregated approximately $2,496,000, $2,439,000 and $2,491,000
in 1999, 1998 and 1997, respectively. The Company's obligations under
non-cancelable leases are summarized as follows:
2000........................................................ 2,301,949
2001........................................................ 2,148,413
2002........................................................ 1,929,902
2003........................................................ 1,394,071
2004........................................................ 664,448
Thereafter.................................................. --
----------
$8,438,783
==========
(13) FINANCIAL INSTRUMENTS
The carrying value of all financial instruments classified as a current
asset or current liability are deemed to approximate fair value because of the
short maturity of these instruments.
The difference between the fair value of the senior notes and the carrying
value at December 31, 1999 is approximately $0.8 million. The fair value of the
senior notes is based upon discounted cash flows using rates available to the
Company for debt with similar terms and maturities. The Company continually
evaluates the benefits of refinancing versus the related prepayment penalties.
The carrying value of the Company's borrowings under the long-term revolving
credit agreement approximates fair value as such borrowings bear variable
interest rates which fluctuate with market conditions. Because considerable
judgement is required in interpreting market data to develop estimates of fair
value, the estimates are not necessarily indicative of the amounts that could be
realized or would be paid in a current market exchange. The effect of using
different market assumptions or estimation methodologies may be material to the
estimated fair value amount.
(14) COMPREHENSIVE INCOME (LOSS)
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This Statement requires that all items recognized under
accounting standards as components of comprehensive income be reported in a
financial statement that is displayed with the same prominence as other
financial statements. Other comprehensive income may include foreign currency
translation adjustments, minimum pension liability adjustments and unrealized
gains and losses on marketable securities classified as available for sale. The
Company's items of other comprehensive income (loss) include foreign currency
F-23
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(14) COMPREHENSIVE INCOME (LOSS) (CONTINUED)
translation adjustments and minimum pension liability adjustments. The
components of other comprehensive loss for 1999, 1998 and 1997 are as follows:
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
FOREIGN CURRENCY MINIMUM PENSION
TRANSLATION ADJUSTMENT LIABILITY TOTAL
---------------------- --------------- -----------
Balance at December 31, 1996................. $ (547,028) $ -- $ (547,028)
Foreign currency translation adjustment...... (272,118) -- (272,118)
----------- --------- -----------
Balance at December 31, 1997................. (819,146) -- (819,146)
Foreign currency translation adjustment...... (540,742) -- (540,742)
Minimum pension liability, net of taxes of
$63,000.................................... -- (105,862) (105,862)
----------- --------- -----------
Balance at December 31,1998.................. (1,359,888) (105,862) (1,465,750)
Foreign currency translation adjustment...... 375,856 -- 375,856
Minimum pension liability, net of taxes of
$27,000.................................... -- 60,788 60,788
----------- --------- -----------
Balance at December 31, 1999................. $ (984,032) $ (45,074) $(1,029,106)
=========== ========= ===========
(15) SEGMENT INFORMATION
At December 31, 1998, the Company adopted SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". This statement established
standards for reporting information about operating segments and related
disclosure about products and services and geographic areas. 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.
F-24
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(15) SEGMENT INFORMATION (CONTINUED)
1999 1998 1997
-------- -------- --------
Net sales
Cosmetic.................................................. $203,484 $213,714 $207,260
Pharmaceutical............................................ 63,863 61,148 55,750
-------- -------- --------
Consolidated.............................................. $267,347 $274,862 $263,010
======== ======== ========
Operating income (loss)
Cosmetic.................................................. $(11,938) $ 10,381 $ 15,424
Pharmaceutical............................................ 9,313 12,513 9,828
-------- -------- --------
Consolidated.............................................. $ (2,625) $ 22,894 $ 25,252
======== ======== ========
Gains on sales of facility and land......................... $ 3,043 $ -- $ --
-------- -------- --------
Interest expense, net....................................... $ 5,901 $ 4,433 $ 3,375
-------- -------- --------
Earnings (loss) before taxes................................ $ (5,483) $ 18,461 $ 21,878
-------- -------- --------
Identifiable assets
Cosmetic.................................................. $122,417 $120,664 $ 87,449
Pharmaceutical............................................ 22,674 20,205 16,635
Corporate (unallocated assets)............................ 35,470 36,605 45,230
-------- -------- --------
Consolidated.............................................. $180,561 $177,474 $149,314
======== ======== ========
Depreciation and amortization
Cosmetic.................................................. $ 6,903 $ 5,966 $ 5,418
Pharmaceutical............................................ 450 428 401
-------- -------- --------
Consolidated.............................................. $ 7,353 $ 6,394 $ 5,819
======== ======== ========
Expenditures for property, plant and equipment and
long-lived assets
Cosmetic.................................................. $ 2,294 $ 14,167 $ 2,282
Pharmaceutical............................................ 288 320 253
Corporate (unallocated assets)............................ 4,706 4,702 12,695
-------- -------- --------
Consolidated.............................................. $ 7,288 $ 19,189 $ 15,230
======== ======== ========
Sales to one customer by the cosmetic and pharmaceutical segments combined
were 25.4%, 21.5% and 22.7% of consolidated net sales for 1999, 1998 and 1997,
respectively and combined sales to another customer were 10.4% of consolidated
net sales in 1999 and 10.3% in 1998.
Three customers accounted for 34.2% and two customers accounted for 35.4% of
the Company's net accounts receivable at December 31, 1999 and 1998,
respectively.
(16) SUBSEQUENT EVENT
On February 22, 2000, the Company purchased a 68,000 square foot
manufacturing, warehousing and office facility in Barrie, Ontario for
$1,828,000. The purchase was financed with a combination of a mortgage bridge
loan and a five year mortgage. The existing 39,000 square foot manufacturing,
warehousing and office facility in Barrie, Ontario, was included in property,
plant and equipment as of December 31, 1999, with a net book value of
approximately $458,000 and is currently in contract for sale with
F-25
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(16) SUBSEQUENT EVENT (CONTINUED)
estimated proceeds of $790,000. Approximately $631,000 of the proceeds will be
used to satisfy the mortgage bridge loan.
(17) UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of quarterly operating results (in thousands of
dollars except per share amounts):
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net sales............................... $61,756 $70,557 $64,586 $70,448
Cost of goods sold...................... 27,774 30,723 34,748 31,676
Net earnings (loss)..................... 366 1,567 (6,066) 131
Earnings (loss) per common share:
Basic................................. $ .05 $ .21 $ (.81) $ .02
======= ======= ======= =======
Diluted............................... $ .05 $ .20 $ (.81) $ .02
======= ======= ======= =======
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
Net sales............................... $65,416 $73,971 $70,663 $64,812
Cost of goods sold...................... 25,438 29,420 30,527 30,425
Net earnings (loss)..................... 3,251 4,405 3,784 (363)
Earnings (loss) per common share:
Basic................................. $ .42 $ .57 $ .49 $ (.05)
======= ======= ======= =======
Diluted............................... $ .38 $ .53 $ .46 $ (.05)
======= ======= ======= =======
Earnings (loss) per share calculations for each of the quarters are based on
weighted-average number of shares outstanding in each period. Therefore, the sum
of the quarters in a year does not necessarily equal the year's earnings per
share.
F-26
SCHEDULE II
DEL LABORATORIES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
ADDITIONS
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND END
DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS(1) OF PERIOD
- ----------- ---------- ---------- ------------- ----------
Year ended December 31, 1997 allowances for
doubtful accounts............................ $1,500,000 $ 65,000 $265,000 $1,300,000
========== ======== ======== ==========
Year ended December 31, 1998 allowances for
doubtful accounts............................ $1,300,000 $174,000 $174,000 $1,300,000
========== ======== ======== ==========
Year ended December 31, 1999 allowances for
doubtful accounts............................ $1,300,000 $112,000 $112,000 $1,300,000
========== ======== ======== ==========
- ------------------------
(1) Uncollectible accounts written off, net of recoveries.
F-27
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
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3.1 (a) Restated Certificate of Incorporation as filed with the
Delaware Secretary of State on March 29, 1996.
3.2 (b) Certificate of Amendment filed with the Delaware Secretary
of State on June 4, 1996.
3.3 Certificate of Amendment of the Restated Certificate of
Incorporation filed with the Delaware Secretary of State on
June 3, 1998.
3.4 (a) By-Laws as amended through December 14, 1995.
10.1 (c) Employee Pension Plan, effective January 1, 1989 (amended
and restated).
10.2 (d) Employee's Stock Ownership Plan, effective January 1, 1989.
10.3 (e) Amendment No. 1 to Employee's Stock Ownership Plan.
10.4 (c) Amendment No. 2 to Employee's Stock Ownership Plan.
10.5 (c) 401(k) Plan effective January 1, 1989 (amended and
restated).
10.6 Amendment No. 1 to 401(k) Plan adopted December 21, 1995.
10.7 Amendment No. 2 to 401(k) Plan adopted March 16, 2000.
10.8 (c) Supplemental Executive Retirement Plan (amended and
restated).
10.9 (i) Amendment No. 1 effective January 1, 1997 to Supplemental
Executive Retirement Plan.
10.10(j) Amendment No. 3 to Supplemental Executive Retirement Plan.
10.11(e) 1984 Stock Option Plan, as amended to date.
10.12(f) 1994 Stock Plan, as amended as of May 27, 1999.
10.13(f) Annual Incentive Plan, as amended as of May 27, 1999.
10.14 Amended and Restated Employment Agreement dated as of July
1, 1999 between the Registrant and Dan K. Wassong.
10.15(e) Loan Agreement with Dan K. Wassong, dated as of August 22,
1984 and related promissory notes.
10.16(c) Loan Agreement with Dan K. Wassong, dated as of April 9,
1988.
10.17(g) Loan Agreement with Dan K. Wassong, dated as of November 14,
1990.
10.18(e) Employment Agreement with Charles J. Hinkaty, as amended.
10.19(i) Amendment to Employment Agreement with Charles J. Hinkaty,
dated April 22, 1996.
10.20(e) Employment Agreement with Harvey P. Alstodt, as amended.
10.21(i) Amendment to Employment Agreement with Harvey P. Alstodt,
dated April 22, 1996.
10.22 Amendment to Employment Agreement with Harvey P. Alstodt
dated December 30, 1997.
10.23(e) Employment Agreement with William H. McMenemy, as amended.
10.24(i) Amendment to Employment Agreement with William H. McMenemy,
dated April 22, 1996.
10.25(j) Employment Agreement with Enzo J. Vialardi, dated December
30, 1998.
10.26(j) Employment Agreement with James Lawrence, dated March 1993.
10.27(j) Amendment to Employment Agreement with James Lawrence, dated
July 12, 1995.
EXHIBIT NO. DESCRIPTION
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10.28(j) Second Amendment and Employment Agreement with James
Lawrence, dated March 31, 1998.
10.29(e) Life Insurance Agreement with Robert H. Haines, as trustee,
dated as of February 18, 1993.
10.30(h) Lease between Registrant and Coliseum Towers Associates.
10.31(h) Purchase Money Promissory Note with Carver Boat Corporation.
10.32 Amended and Restated Loan Agreement dated as of February 25,
2000 among the Registrant, as borrower, Del Pharmaceuticals,
Inc. ("DPI"), Parfums Schiaperlli, Inc. ("Parfums"), Royce &
Rader, Inc. ("Royce") and 565 Broad Hollow Realty Corp.
("565"), as guarantors, The Chase Manhattan Bank, as agent
for the lenders, and The Chase Manhattan Bank and European
American Bank, as lenders.
10.33 Form of Trademark Collateral Assignment and Security
Agreement dated as of February 25, 2000, between the
Registrant and The Chase Manhattan Bank, as Collateral
Agent. Similar agreements were executed by DPI and Parfums.
10.34 Form of Security Agreement dated as of February 25, 2000
between the Registrant and The Chase Manhattan Bank, as
Collateral Agent. Similar agreements were executed by DPI,
Parfums, Royce and 565.
10.35 Form of General Guaranty dated as of February 25, 2000 by
DPI in favor of The Chase Manhattan Bank, as Collateral
Agent. Similar agreements were executed by Parfums, Royce
and 565.
10.36 Amended and Restated Loan Agreement dated as of February 25,
2000 among the Registrant, DPI, Parfums, Royce, 565 and
Jackson National Life Insurance Company.
21.1 List of Subsidiaries.
23.1 Consent of KPMG LLP dated March 27, 2000.
27 Financial Data Schedule
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(a) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1995. The exhibit numbers in such Form 10-K are as
follows: Restated Certificate, Exhibit 1; and By-Laws, Exhibit 2.
(b) This exhibit was filed as an exhibit to the Registrant's Form 10-Q for the
quarter ended June 30, 1996. The exhibit number in such Form 10-Q is
Exhibit 1.
(c) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1994. The exhibit numbers in such Form 10-K are as
follows: Employee Pension Plan, Exhibit 2; Amendment No. 2 to Employee's
Stock Ownership Plan, Exhibit 3; Loan Agreement with Dan K. Wassong,
Exhibit 4; 401(k) Plan, Exhibit 5; Supplemental Executive Retirement Plan,
Exhibit 6.
(d) This exhibit was filed as an exhibit to the Registrant's Form 10-K for the
year ended December 31, 1989. The exhibit number in such Form 10-K is
Exhibit 2.
(e) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1993. The exhibit numbers in such Form 10-K are as
follows: Amendment No. 1 to Employee's Stock Ownership Plan, Exhibit 2; 1984
Stock Option Plan, Exhibit 3; Loan Agreement with Dan K. Wassong dated
August 22, 1984, Exhibit 4; Employment Agreement with Charles J. Hinkaty,
Exhibit 5; Employment Agreement with Harvey P. Alstodt, Exhibit 6;
Employment Agreement with William H. McMenemy, Exhibit 7; Life Insurance
Agreement with Robert H. Haines, as trustee, Exhibit 9.
(f) These exhibits were filed as exhibits to the Registrant's Definitive Proxy
Statement dated May 27, 1999, relating to the Registrant's 1999 Annual
Meeting of Stockholders. The exhibit numbers in such
Proxy Statement are as follows: 1994 Stock Plan, as amended and restated,
Exhibit A; Annual Incentive Plan, as amended and restated, Exhibit B.
(g) This exhibit was filed on April 1, 1991, as an exhibit to the Registrant's
Form 10-K for the year ended December 31, 1990. The exhibit number in such
Form 10-K is Exhibit 2.
(h) These exhibits were filed as exhibits to the Registrant's Form 10-Q for the
quarter ended September 30, 1997. The exhibit numbers in such Form 10-Q are
as follows: Lease between Registrant and Coliseum Towers Associates,
Exhibit 10.1; Purchase Money Promissory Note with Carver Boat Corporation,
Exhibit 10.2.
(i) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1996, as follows: 10.9 above was filed as Exhibit 1
to the 1996 10-K; 10.19 above was filed as Exhibit 2 to the 1996 10-K; 10.21
above was filed as Exhibit 3 to the 1996 10-K; and 10.24 above was filed as
Exhibit 4 to the 1996 10-K.
(j) These exhibits were filed as exhibits to the Registrant's Form 10-K for the
year ended December 31, 1998, as follows: 10.10 above was filed as
Exhibit 10.32 to the 1998 10-K; 10.25 above as filed as Exhibit 10.29 to the
1998 10-K; 10.26 above was filed as Exhibit 10.30 to the 1998 10-K; and
10.27 above was filed as Exhibit 10.31 to the 1998 10-K.