[cad 228]<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
Commission File No. 1-5439
DEL LABORATORIES, INC.
----------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-1953103
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
178 EAB Plaza, Uniondale, New York 11556
----------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 844-2020
-------------------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES (X) NO ( )
The number of shares of Common Stock, $1 par value, outstanding as of
November 11, 1998 was 7,533,201.
<PAGE>
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index
Part I. FINANCIAL INFORMATION
Page
Item 1. Financial Statements:
Consolidated Balance Sheets as of
September 30, 1998 and December 31, 1997 3
Consolidated Statements of Earnings for the three and
nine months ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION 11
SIGNATURES 12
All other schedules and compliance information called for by the instructions to
Form 10-Q have been omitted since the required information is not present or not
present in amounts sufficient to require submission.
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<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(In thousands except for share and per share data)
Assets September 30 December 31
1998 1997
--------- ---------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 2,522 $ 14,979
Accounts receivable, less allowance for
doubtful accounts of $1,300 in 1998 and 1997,
respectively 44,585 30,708
Inventories 58,667 47,687
Deferred income taxes 2,127 2,127
Prepaid expenses and other current assets 1,478 1,858
--------- ---------
Total current assets 109,379 97,359
Property, plant and equipment, net 36,809 36,392
Intangibles arising from acquisitions, net 18,519 8,144
Other assets 7,451 7,419
--------- ---------
Total assets $ 172,158 $ 149,314
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 485 $ 496
Short-term borrowing 14,250 -
Accounts payable 30,128 28,501
Accrued liabilities 12,942 13,968
Income taxes payable 955 818
--------- ---------
Total current liabilities 58,760 43,783
Long-term pension liability, less current portion 5,801 5,801
Deferred income taxes, net 1,321 1,321
Long-term debt, less current portion 43,707 43,879
--------- ---------
Total liabilities 109,589 94,784
--------- ---------
Shareholders' equity:
Preferred stock $.01 par value, authorized
1,000,000 shares; no shares issued - -
Common stock $1 par value, authorized
20,000,000 and 10,000,000 shares, respectively;
issued 10,000,000 shares 10,000 10,000
Additional paid-in capital 1,746 699
Accumulated other comprehensive income (880) (819)
Retained earnings 81,843 71,188
--------- ---------
92,709 81,068
Less: Treasury stock, at cost, 2,438,901 shares
in 1998 and 2,378,063 shares in 1997 (28,742) (24,991)
Receivables for stock options exercised (1,398) (1,547)
--------- ---------
Total shareholders' equity 62,569 54,530
--------- ---------
Total liabilities and shareholders' equity $ 172,158 $ 149,314
========= =========
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands except for share and per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net sales $ 70,663 $ 68,865 $ 210,050 $ 198,174
Cost of goods sold 30,527 26,541 85,385 77,070
Selling and administrative expenses 32,725 35,342 102,321 101,584
--------- --------- --------- ---------
Operating income 7,411 6,982 22,344 19,520
Interest expense 1,065 1,029 3,189 2,970
Interest income (57) (172) (212) (389)
--------- --------- --------- ---------
Interest expense, net 1,008 857 2,977 2,581
--------- --------- --------- ---------
Earnings before income taxes 6,403 6,125 19,367 16,939
Income taxes 2,619 2,450 7,927 6,776
--------- --------- --------- ---------
Net earnings $ 3,784 $ 3,675 $ 11,440 $ 10,163
========= ========= ========= =========
Earnings per common share:
Basic $ 0.50 $ 0.49 $ 1.50 $ 1.35
========= ========= ========= =========
Diluted $ 0.47 $ 0.44 $ 1.40 $ 1.24
========= ========= ========= =========
Weighted average common
shares outstanding:
Basic 7,569,000 7,576,000 7,599,000 7,556,000
========= ========= ========= =========
Diluted 8,004,000 8,278,000 8,150,000 8,213,000
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
DEL LABORATORIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(In thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 11,440 $ 10,163
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,891 3,181
Provision for doubtful accounts 118 100
Other non-cash operating items 97 275
Changes in operating assets and liabilities:
Accounts receivable (13,995) 1,669
Inventories (9,980) (12,508)
Prepaid expenses and other current assets 380 578
Other assets and other liabilities (32) (2,854)
Accounts payable 1,825 3,777
Accrued liabilities (1,026) 3,378
Income taxes 1,729 -
--------- ---------
Net cash provided by (used in) operating activities (4,553) 7,759
--------- ---------
Cash flows used in investing activities:
Property, plant and equipment additions (4,833) (5,424)
Purchase of intangibles and other assets (11,851) -
--------- ---------
Net cash used in investing activities (16,684) (5,424)
--------- ---------
Cash flows provided by (used in) financing activities:
Increase in short-term borrowings 14,250 -
Principal payments of long-term debt (183) -
Exercise of stock options 48 2,557
Acquisition of treasury stock (4,320) (4,684)
Dividends paid (997) (594)
--------- ---------
Net cash provided by (used in) financing activities 8,798 (2,721)
--------- ---------
Effect of exchange rate changes on cash (18) (2)
--------- ---------
Net decrease in cash and cash equivalents (12,457) (388)
--------- ---------
Cash and cash equivalents at beginning of year 14,979 14,516
--------- ---------
Cash and cash equivalents at end of period $ 2,522 $ 14,128
========= =========
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
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<PAGE>
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited consolidated financial statements of Del
Laboratories, Inc. and subsidiaries (the Company) have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements.
Interim results are not necessarily indicative of results for a full year.
A summary of the Company's significant accounting policies is presented in
its 1997 Annual Report to Shareholders. Users of financial information
produced for interim periods are encouraged to refer to the footnotes
contained in the Annual Report to Shareholders when reviewing interim
financial results.
In the opinion of management, the accompanying interim financial statements
contain all material adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position, results of operations and cash flows of the Company for interim
periods.
On February 6, 1998, the Company's Board of Directors approved a
four-for-three common stock split 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 as of December 31, 1997. All references to number of shares and per
share amounts 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.
Certain reclassifications were made to prior year amounts to conform with
the 1998 presentation.
2. INVENTORY
Classification of inventories were as follows (in thousands):
September 30 December 31
1998 1997
-------- --------
Raw Materials $ 38,565 $ 22,563
Work In Process 4,429 4,326
Finished Goods 15,673 20,798
-------- --------
$ 58,667 $ 47,687
======== ========
3. EARNINGS PER SHARE
Earnings per share is computed in accordance with the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share", which became effective for the Company as of December 31, 1997. As
required by SFAS No. 128, earnings per share for all prior periods
presented have been restated. Basic earnings per share is computed by
dividing income available to common shareholders (which for the Company
equals its recorded net income) by the weighted average number of common
shares outstanding during the period. Such shares outstanding include the
weighted average number of shares of common stock held by the Company's
employee stock ownership plan which totaled 507,318 and 512,739 at
September 30, 1998 and 1997, respectively. 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.
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<PAGE>
4. NEW ACCOUNTING PRONOUNCEMENTS
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 an annual financial statement that is displayed with the same
prominence as other annual 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 only item of
other comprehensive income is foreign currency translation adjustments.
Annual financial statements for prior periods will be reclassified, as
required. The Company's total comprehensive income was as follows (in
thousands):
Nine Months Ended September 30
1998 1997
--------- ---------
Net earnings $ 11,440 $ 10,163
Foreign currency translation adjustment (61) 134
--------- ---------
Total comprehensive income $ 11,379 $ 10,297
========= =========
5. ASSET ACQUISITION
On May 12, 1998, the Company acquired the intellectual property rights and
other assets of the Cornsilk 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 accordance with
company policy. Amortization of $226 thousand was recorded during the nine
months ended September 30, 1998.
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<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
(1) RESULTS OF OPERATIONS
THIRD QUARTER AND NINE MONTHS ENDED SEPTEMBER 1998 VERSUS SEPTEMBER 1997
NET SALES
Net sales for the third quarter of 1998 were $70.7 million, an increase of
2.6% compared to $68.9 million in 1997. Net sales for the first nine months
of 1998 were $210.0 million, an increase of 6.0% compared to $198.2 million
in 1997.
Cosmetics Division net sales for the third quarter of 1998 were $54.7
million, compared to $54.6 million in 1997. Cosmetics Division net sales
for the first nine months of 1998 were $164.7 million, an increase of 4.2%
compared to $158.1 million in 1997. This increase is primarily due to
volume growth in the Sally Hansen family of products.
Pharmaceutical Division net sales for the third quarter of 1998 were $16.0
million, compared to $14.3 million in 1997. Pharmaceutical Division net
sales for the first nine months of 1998 were $45.3 million, an increase
of 13.0% compared to $40.1 million in 1997. These increases were due
primarily to volume growth in the Orajel family of products.
COST OF SALES
Cost of Sales for the third quarter of 1998 were $30.5 million, or 43.2% of
net sales, as compared to $26.5 million, or 38.5% of net sales in 1997.
The increase in cost of sales, as a percentage of net sales, in the third
quarter is principally due to higher manufacturing costs and a change in
the mix of business and product returns within the Cosmetics Division
compared to the third quarter of 1997.
Cost of Sales for the first nine months of 1998 were $85.4 million, or
40.6% of net sales, as compared to $77.1 million, or 38.9% of net sales in
1997. The increase in cost of sales, as a percentage of net sales, is
primarily attributable to higher manufacturing costs and product returns in
the third quarter and a change in the mix of business within the Cosmetics
Division compared to 1997.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses for the third quarter of 1998 were
$32.7 million, compared to $35.3 million in 1997. The decrease was
primarily related to reduced advertising and promotional expenses during
the third quarter as compared to prior year. Selling and administrative
expenses are subject to quarterly variability due to the timing of
advertising and other spending related to promotional programs.
Selling and administrative expenses were $102.3 million for the first nine
months of 1998, compared to $101.6 million in 1997.
NET INTEREST EXPENSE
Interest expense, net of interest income, for the third quarter of 1998 was
$1.0 million, compared to $.9 million in 1997. The increase in the third
quarter is due primarily to short-term borrowing related to the acquisition
of intellectual property rights and other assets of the Cornsilk brand of
facial make-up in May 1998.
Interest expense, net of interest income, for the first nine months of 1998
was $3.0 million, compared to $2.6 million in 1997. The increase for
the nine months is due to imputed interest (non-cash expense) related to
the purchase of land and buildings in North Carolina in May, 1997, and
interest expense on short-term borrowing related to the acquisition of
intellectual property rights and other assets of the Cornsilk brand of
facial make-up in May 1998.
-8-
<PAGE>
PROVISION FOR INCOME TAXES
The provision for income taxes is based on the Company's expected effective
annual tax rate of 41% in 1998 compared to 40% in 1997.
NET EARNINGS
Net earnings for the third quarter of 1998 were $3.8 million, compared to
$3.7 million reported for the third quarter of 1997. Net earnings for the
first nine months of 1998 were $11.4 million compared to $10.2 million
reported for the first nine months of 1997.
(2) LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents of $2.5
million as compared to $14.1 million and $15.0 million at September 30,
1998 and December 31, 1997, respectively.
Net cash used in operating activities for the nine months ended September
30, 1998 was $4.6 million due primarily to increases in accounts receivable
and inventories, compared to $7.8 million provided by operating activities
in 1997.
Cash used for property, plant and equipment additions was $4.8 million for
the nine months ended September 30, 1998 compared to $5.4 million in the
prior year.
On May 12, 1998, the Company acquired the intellectual property rights and
other assets of the Cornsilk brand of facial make-up for approximately
$11.9 million in cash (see Note 5 to the consolidated financial
statements), which was financed by utilizing existing cash and unused
short-term credit facilities. The Company intends to refinance the
purchase on a long-term basis.
Net cash provided by financing activities was $8.8 million for the nine
months ended September 30, 1998 due primarily to an increase in short-term
borrowings offset by treasury stock acquisitions, compared to $2.7 million
used in financing activities in 1997.
The Company believes that cash from future operations, cash on hand and
amounts available from short-term credit facilities, will be sufficient to
satisfy the Company's liquidity needs for the foreseeable future.
YEAR 2000 CONVERSION
The Company is addressing the issue of many existing computer programs
using only the last two digits to refer to a year. Therefore, these
computer programs do not properly recognize a year that begins with "20"
instead of the familiar "19". If not corrected, many computer applications
could fail or create erroneous results. A committee specifically created
to resolve Year 2000 issues, led by a member of the Board of Directors and
comprised of senior corporate executives and an outside expert, as well as
sub-committees and task forces meet regularly.
The Company's efforts to identify and address issues relating to its
readiness for Year 2000 have included the following: The identification
phase (approximately 90% complete) consisting of computer based systems,
software, third party programs and all hardware including embedded
microprocessors. The assessment phase (approximately 85% complete) has
focused on those applications most critical to the business including
examination of all coding used for date calculations. The remediation
phase (approximately 65% complete) consisting of systems changes, where
necessary, by replacement, modification or upgrade. The testing phase
(approximately 15% complete) includes full systems tests planned during the
first quarter of 1999 at which time systems dates will be rolled forward on
test machines to check performance and computational accuracy. All
significant suppliers, customers, financial institutions, as well as all
customers doing business electronically with the Company have been
contacted, in order to identify potential areas of concern. It is
anticipated that all of the above phases will be substantially completed by
mid 1999.
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<PAGE>
YEAR 2000 CONVERSION (CONTINUED)
The Company currently estimates that remediation costs are not anticipated
to exceed $1,000,000 for replacement systems, software, discovery tools and
expenses necessary to achieve Year 2000 compliance.
Improper or inadequate remediation of Year 2000 problems by parties with
whom the Company does business could adversely affect the Company's supply
chain and subsequently the ability to effectively manage production and
distribution activities. In addition, administrative functions essential
to the day to day operation of the business could be impaired if Year 2000
remediation is not completed in a timely manner. Due to the general
uncertainty inherent in the Year 2000 problem, resulting primarily from the
uncertainty of the Year 2000 readiness of parties with whom the Company
does business, the Company is unable to determine at this time whether the
consequences of Year 2000 failures will have a material impact on the
Company's results of operations, liquidity or financial condition.
The Company is currently identifying and documenting potential business
disruptions and continuity planning procedures. The focus of this activity
is on potential failures of internal and external systems required to carry
out normal business operations, including services provided by the public
infrastructure such as electric power, transportation and
telecommunications. The Company expects this activity to be an on-going
process well into the third quarter of 1999.
The above comments on the Year 2000 issue contain forward-looking
statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and resources that should be read in conjunction
with the following disclosure on Forward-Looking Statements.
FORWARD - LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and
Financial Condition and other sections of this Form 10-Q include
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities and Exchange Act
of 1934 (the "Exchange Act"). All statements other than statements of
historical information provided herein are forward-looking statements and
may contain information about financial results, economic conditions,
trends 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 and mass merchandiser
relationships due to the concentration of sales generated by such chains,
changes in fashion oriented color cosmetics trends, and trends in the
general economy.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management's analysis, judgment, belief or
expectation only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect
events or circumstances that arise after the date hereof. In addition to
the disclosure contained herein, readers should carefully review any
disclosure of risks and uncertainties contained in other documents the
Company files or has filed from time to time with the Securities and
Exchange Commission pursuant to the Exchange Act.
-10-
<PAGE>
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
-11-
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DEL LABORATORIES, INC.
----------------------
(Registrant)
Date: November 13, 1998 /s/ Dan K. Wassong
------------------------
Dan K. Wassong
Chairman, President and
Chief Executive Officer
Date: November 13, 1998 /s/ Enzo J. Vialardi
------------------------
Enzo J. Vialardi
Executive Vice President and
Chief Financial Officer
-12-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-START> JUN-01-1998 JAN-01-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 2,522 2,522
<SECURITIES> 0 0
<RECEIVABLES> 44,585 44,585
<ALLOWANCES> 1,300 1,300
<INVENTORY> 58,667 58,667
<CURRENT-ASSETS> 109,379 109,379
<PP&E> 36,809 36,809
<DEPRECIATION> 22,513 22,513
<TOTAL-ASSETS> 172,158 172,158
<CURRENT-LIABILITIES> 58,760 58,760
<BONDS> 43,707 43,707
0 0
0 0
<COMMON> 10,000 10,000
<OTHER-SE> 52,569 52,569
<TOTAL-LIABILITY-AND-EQUITY> 172,158 172,158
<SALES> 70,663 210,050
<TOTAL-REVENUES> 70,663 210,050
<CGS> 30,527 85,385
<TOTAL-COSTS> 63,252 187,706
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> (182) 118
<INTEREST-EXPENSE> 1,008 2,977
<INCOME-PRETAX> 6,403 19,367
<INCOME-TAX> 2,619 7,927
<INCOME-CONTINUING> 3,784 11,440
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,784 11,440
<EPS-PRIMARY> .50 1.50
<EPS-DILUTED> .47 1.40
</TABLE>
