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), Dermarest (psoriasis) and Auro-Dri (ear remedy). The Company's products are sold principally in the United States and Canada to wholesalers and independent 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 major drug store chains: Walgreens, Rite Aid, CVS and Eckerd; major national mass merchandiser chains: Wal-Mart, K-Mart and Target, and numerous regional chain drug stores and mass merchandisers. The Company also distributes its pharmaceutical products to drug wholesalers, including McKesson HBOC, Amerisource-Bergen Brunswig and Cardinal Health, Inc. and national food chains, including Ahold, Safeway, Kroger and Albertson's. Other than Wal-Mart Stores, Inc., which accounted for 23.0%, 23.9% and 24.8% of the Company's total net sales for 2001, 2000 and 1999, respectively, and Walgreens which accounted for 11.6%, 11.4% and 10.4% of the Company's total net sales in 2001, 2000 and 1999, respectively, no single customer accounted for more than 10% of the Company's total net sales. Although the Company's loss of one or more customers that may account for a significant portion of the Company's sales, or any significant decrease in sales to any of these customers, could have a material adverse effect on the Company's business, financial condition or results of operations, the Company has no reason to believe that any such loss of customer or decrease in sales will occur. In January 2002, K-Mart Corporation filed a bankruptcy petition for reorganization under Chapter XI of the U.S. Bankruptcy Code. The Company has resumed shipments to K-Mart subsequent to their receipt of new debtor-in-possession financing and continues to believe that they are a valuable customer.
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 $30,456,000 in 2001, or 9.2% of net sales, $27,755,000 in 2000, or 9.4% of net sales and $28,976,000 in 1999 or 10.9% of 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.
Certain financial information regarding the Company's industry segments is set forth in the table below.
INDUSTRY SEGMENTS (In thousands of dollars) -----------------
2001 2000 1999 ---- ---- ---- Net sales to unaffiliated customers:
Cosmetics $ 262,258 $ 229,194 $ 201,251 Pharmaceuticals 70,421 65,689 63,805
Operating income (loss):
Cosmetics 11,644 4,989 (12,166) Pharmaceuticals 11,297 11,117 9,313
Identifiable assets:
Cosmetics 127,809 133,090 122,417 Pharmaceuticals 25,549 24,737 22,674 Corporate (unallocated assets) 38,594 36,403 35,470
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 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 over thirty foreign countries through a limited number of subsidiaries and through contracts with local distributors and licensees. Export net sales (which exclude sales in Canada and Puerto Rico) have historically not exceeded 5% of the Company's total net sales in any year. Export net sales represented approximately 2% of the Company's total net sales in 2001, 2000 and 1999.
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 $5,414,000, $5,292,000 and $5,219,000 in 2001, 2000 and 1999, 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 and Oil of Olay), Cosmair (Maybelline and L'Oreal) and, in the over-the-counter pharmaceuticals market, Whitehall-Robbins Division of Wyeth Corp., Pfizer, Procter and Gamble Co., Glaxo SmithKline, Bristol-Myers Squibb, Colgate Palmolive, Chattem, Inc., Bayer Corp. 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 2009, 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 1,700 employees. Approximately 400 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
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 facility for both the cosmetics and pharmaceutical segments is located at 565 Broad Hollow Road, Farmingdale, New York. The building is a brick faced concrete block structure containing approximately 120,000 square feet of floor space. The Company also occupies a steel beamed and brick faced concrete block building, adjacent to the Farmingdale facility described above for administrative offices, which contains approximately 20,000 square feet of floor space. Both buildings are owned by the Company. On February 13, 2002, the Company sold 13.5 acres of vacant land in Farmingdale, New York for gross proceeds of $3,335,000. The land was included in property, plant and equipment at December 31, 2001, with a book value of $500,000. In connection with this sale, an option was granted to the buyer for the remaining 8.5 acres of improved land and buildings owned by the Company. The option is for a purchase price of no less than $5,000,000 and cannot be exercised before December 1, 2004 or after December 1, 2005.
The Company 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 plans to outsource all significant production, consolidate the remaining production into existing facilities and close down production at the facility by March 31, 2002.
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.
The Company owns 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 property is subject to a first mortgage. The facility is used for manufacturing and shipping and contains the administrative offices of its Canadian subsidiaries.
The Company 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, warehousing and distribution. 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 principal 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 used primarily for the cosmetics segment.
The Company believes that its facilities are adequate to meet operating needs at reasonable levels of production.
ITEM 3
ITEM 3 - LEGAL PROCEEDINGS
The Company is involved in various 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.
ITEM 4
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5
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:
2001 2000 ------------- ----------------
HIGH LOW HIGH LOW
First Quarter $ 11.38 $ 9.25 $ 10.25 $ 7.13
Second Quarter $ 12.15 $ 10.10 $ 12.94 $ 8.00
Third Quarter $ 17.25 $ 10.55 $ 12.88 $ 10.38
Fourth Quarter $ 17.45 $ 14.00 $ 12.63 $ 9.38
There were 475 holders of record of the Company's common stock at December 31, 2001. This does not include beneficial holders whose shares are held of record by nominees. The Company paid regular quarterly cash dividends of $.035 from January 1998 through September 1999, a 2% stock dividend in December 1999 and 5% stock dividends in December 2000 and 2001. The Company has paid uninterrupted dividends for the past twenty-six years.
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, 2001, no amounts were available for the repurchase of treasury stock.
ITEM 6
ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
The operating and balance sheet data below was derived from the consolidated financial statements of the Company. The financial data should be read in conjunction with the consolidated financial statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
ITEM 7
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
The Company makes estimates and assumptions in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company believes that the following discussion addresses the Company's most critical accounting policies, which are those that are most important to the portrayal of the Company's financial condition and results of operations and which require management's most difficult and subjective judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Note 1 of the notes to the consolidated financial statements includes a summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements. The following is a brief discussion of the more critical accounting policies employed by the Company.
Revenue Recognition
The Company sells its products to chain drug stores, mass volume retailers, supermarkets 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. The Company generally grants credit based upon analysis of the customer's financial position and previously established buying and selling patterns. The Company does not bill customers for shipping and handling costs and, accordingly, classifies such costs as selling and administrative expense. Revenues are recognized and discounts are recorded when merchandise is shipped. Net sales are comprised of gross revenues less returns and trade discounts and allowances. The Company allows customers to return their unsold products when they meet certain criteria as outlined in the Company's trade terms. The Company regularly reviews and revises, as deemed necessary, its estimates of reserves for future sales returns based primarily upon actual return rates by product and planned product discontinuances. The Company records estimated reserves for future sales returns as a reduction of sales, cost of sales and accounts receivable. Returned products which are recorded as inventories are valued based on estimated realizable value. The physical condition and marketability of the returned products are the major factors considered by the Company in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from estimates if factors such as economic conditions, customer inventory levels or competitive conditions differ from expectations.
Co-operative Advertising and Promotional Allowances
The Company has various performance-based arrangements with retailers to reimburse them for all or a portion of their promotional activities related to the Company's products. These arrangements primarily allow customers to take deductions against amounts owed to the Company for product purchases. Estimated accruals for promotions and co-operative advertising programs are recorded in the period in which the related revenue is recognized. The Company regularly reviews and revises the estimated accruals for the projected costs for these promotions. Actual costs incurred by the Company may differ significantly, either favorably or unfavorably, from estimates if factors such as the level and success of the retailers' programs or other conditions differ from our expectations.
Inventories
Inventories are stated at the lower of cost or market value. Cost is principally determined by the first-in, first-out method. The Company records adjustments to the cost of inventories based upon its forecasted plans to sell, historical scrap and disposal rates and the physical condition of the inventories. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from actual requirements if future economic conditions, the timing of new product introductions, customer inventory levels, fashion-oriented color cosmetic trends or competitive conditions differ from our expectations.
Property, Plant and Equipment and Other Long-Lived Assets
Property, plant and equipment is recorded at cost and is depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in circumstances such as technological advances, changes to the Company's business model or changes in the Company's capital strategy can result in the actual useful lives differing from the Company's estimates. In those cases where the Company determines that the useful life of property, plant and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value, over its revised remaining useful life thereby increasing depreciation expense. Factors such as changes in the planned use of equipment, fixtures, software or planned closing of facilities could result in shortened useful lives.
Long-lived assets, including fixed assets and intangibles other than goodwill, are reviewed by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of any such asset may not be recoverable. The estimate of cash flow is based upon, among other things, certain assumptions about expected future operating performance. The Company's estimates of undiscounted cash flow may differ from actual cash flow due to, among other things, technological changes, economic conditions, changes to its business model or changes in its operating performance. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset.
Pension Benefits
The Company sponsors pension and other retirement plans in various forms covering all eligible employees. Several statistical and other factors which attempt to anticipate future events are used in calculating the expense and liability related to the plans. These factors include assumptions about the discount rate, expected return on plan assets and rate of future compensation increases as determined by the Company, within certain guidelines and in conjunction with its actuarial consultants. In addition, the Company's actuarial consultants also use subjective factors such as withdrawal and mortality rates to estimate the expense and liability related to these plans. The actuarial assumptions used by the Company may differ significantly, either favorably or unfavorably, from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter life spans of participants.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
Net sales were $332.7 million and $294.9 million for 2001 and 2000, respectively, an increase of $37.8 million or 12.8%. Cosmetics net sales were $262.3 million and $229.2 million for 2001 and 2000, respectively, an increase of $33.1 million or 14.4%. The increase is primarily due to volume growth in the Sally Hansen family of brands and in N.Y.C. New York Color. Pharmaceutical net sales were $70.4 million and $65.7 million for 2001 and 2000, respectively, an increase of $4.7 million or 7.2%. The increase is primarily attributable to volume growth of the Orajel brand of oral analgesics and the Dermarest brand of psoriasis treatment.
Cost of sales were $146.0 million or 43.9% of net sales in 2001, compared to $129.7 million or 44.0% in 2000, an increase of $16.3 million or 12.6%. The increase is primarily due to manufacturing costs associated with the increase in unit volume, and to a lesser extent an increase in merchandise scrapped and accelerated depreciation related to the Newark, New Jersey plant closure.
Selling and administrative expenses were $163.8 million or 49.2% of net sales in 2001 compared to $149.1 million or 50.5% of net sales in 2000. The increase in expenses is primarily attributable to increased advertising and promotional expenses, increases in compensation and retirement costs, a charge for a potential environmental liability as described below, and an increase of $3,100,000 in the provision for doubtful accounts related to the K-Mart Chapter XI bankruptcy filing. The improvement in selling and administrative expenses, as a percentage of net sales, is primarily attributable to net sales increasing at a higher rate than increases in spending.
In September 2001, the Company received notice from the Environmental Protection Agency ("EPA") that it was, along with 81 others, a Potentially Responsible Party regarding a Superfund Site ("the Site") located in Glen Cove, New York. According to the notice received from the EPA, the Company's involvement relates to empty drums coming to the Site in 1977 and 1978. The Company recorded an estimate of $550,000 in selling and administrative expenses during the third quarter of 2001 based on information received from the EPA as to its potential liability for past remediation activities. In October 2001, the Company became a member of a Joint Defense Group ("the JDG"). The JDG is currently in negotiations with the EPA in order to develop the amount of settlement costs required for all past and future remediation activities. The Company is currently unable to determine such settlement costs, which may or may not be material to the Company, or the time period over which the costs may be payable.
On June 26, 2001, the Company announced that it would initiate a series of actions resulting in a full closure of the Newark, New Jersey manufacturing facility by the end of the first quarter of 2002. It was estimated that the plant closure would result in the termination of approximately 70 production and clerical employees. Estimated severance, pension curtailment and other exit plan expenses of $226,000 were recorded in the second quarter of 2001. The Company plans to outsource all significant production, consolidate the remaining production into existing facilities and close down production at the facility by March 31, 2002. As of December 31, 2001, 51 production and clerical employees were terminated and $187,000 of exit costs were incurred. The Company believes that the accrued exit cost liability of $39,000 at December 31, 2001 is adequate for the balance of costs to be incurred.
Net interest expense was $6.8 million in 2001 compared to $8.2 million in 2000. The decrease is due to a significant reduction in the average outstanding borrowings in 2001, in addition to decreased borrowing rates, as compared to 2000.
The Company's effective annual tax rate for 2001 was 40%, compared to 43% for 2000. The decrease in the effective tax rate for 2001 is primarily due to the reduced effect of non-deductible expenses on taxable income.
As a result of the above, net earnings increased to $9.8 million, or 2.9% of net sales in 2001, compared to $4.7 million, or 1.6% of net sales in 2000. The Company believes that general inflation has had no significant impact on its earnings (loss) from operations during the last three years.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Net sales were $294.9 million and $265.1 million for 2000 and 1999, respectively, an increase of $29.8 million or 11.3%. Cosmetics net sales were $229.2 million and $201.3 million for 2000 and 1999, respectively, an increase of $27.9 million or 13.9%. The increase is primarily due to volume growth in the Sally Hansen family of brands and in N.Y.C. New York Color, as well as reduced product returns of the Naturistics cosmetics and bath & body care line. Pharmaceutical net sales were $65.7 million and $63.8 million for 2000 and 1999, respectively, an increase of $1.9 million or 3.0%.
Cost of sales were $129.7 million or 44.0% of net sales in 2000, compared to $122.6 or 46.3% of net sales in 1999, an increase of $7.1 million or 5.8%. Cost of sales for 1999 include a reclassification to conform with current year presentation. The improvement in cost of sales, as a percentage of net sales, is due primarily to the increase in unit volume and a reduction in product returns.
Selling and administrative expenses were $149.1 million or 50.5% of net sales in 2000 compared to $145.3 million or 54.8% of net sales in 1999. The improvement in selling and administrative expenses as a percentage of net sales is primarily attributable to net sales increases in excess of selling and administrative expenses.
In April 2000, the Company sold a 39,000 square foot manufacturing warehousing and office facility in Barrie, Ontario, with a net book value of approximately $442,000, for net proceeds of approximately $804,000.
Net interest expense was $8.2 million in 2000 compared to $5.7 million in 1999. The increase is due to higher average borrowings for capital requirements in 2000, in addition to increased borrowing rates, as compared to 1999.
The Company's effective annual tax rate for 2000 was 43%, compared to a tax benefit of 27% for 1999. The benefit in 1999 was limited primarily by the non-deductible portion of certain expenses recorded for financial statement purposes.
As a result of the above, net earnings increased to $4.7 million, or 1.6% of net sales in 2000 compared to a net loss of $4.0 million, or 1.5% of net sales in 1999. The Company believes that general inflation has had no significant impact on its earnings (loss) from operations during the last three years.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2001, the Company had cash and cash equivalents of $2.7 million as compared to $2.9 million in 2000.
Net cash provided by operating activities was $26.2 million and $0.1 million for the years ended December 31, 2001 and 2000, respectively, as compared to net cash used in operating activities of $8.0 million for the year ended December 31, 1999. The increase in net cash provided by operating activities for 2001 as compared to 2000 is due principally to increased earnings, increases in accounts payable and accrued liabilities and a decrease in accounts receivable, partially offset by an increase in inventory. The decrease in accounts receivable is attributable to the timing of shipments during the fourth quarter and increased collections during the period; the increase in accrued liabilities is primarily attributable to increased advertising and promotional costs, and the increases in inventories and accounts payable are due to timing of purchases of raw materials and components to support projected sales levels.
Cash of $0.01 million, $0.8 million and $4.6 million was provided by the sales of land and facilities in 2001, 2000 and 1999, respectively. Cash used for property, plant and equipment additions was $5.6 million, $6.0 million and $7.3 million for 2001, 2000 and 1999, respectively. Capital expenditures for 2001, 2000 and 1999 were primarily for manufacturing machinery and equipment.
Net cash (used in) provided by financing activities was ($20.8) million, $4.5 million and $10.5 million for 2001, 2000 and 1999, respectively. In 2000 and 1999, 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 repayments of short-term lines of credit of $17.3 million and $3.5 million in 2000 and 1999, respectively; principal payments under long-term debt of $20.2 million, $8.1 million and $0.4 million in 2001, 2000 and 1999, respectively; acquisition of shares of the Company's common stock aggregating $0.6 million, $0.7 million and $4.5 million in 2001, 2000 and 1999, respectively, and a dividend payment of $1.0 million in 1999. As of December 31, 2001, the Company was authorized to purchase up to 549,327 additional shares based on existing Board authorization. At December 31, 2001, due to covenant restrictions under the senior notes and revolving credit loan agreements, no amounts were available for the repurchase of treasury stock.
On March 26, 2002, the senior notes were amended and restated. The senior note holder executed a Release and Termination Agreement of the collateral liens granted in the previous amendment. The notes require annual principal repayments of $4.0 million on May 31, 2002; $8.0 million on May 31, 2003 and May 31, 2004 and $16.0 million on May 31, 2005. The amended agreement is unsecured and includes 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 March 26, 2002, the Company amended and restated the revolving credit agreement entered into in December 1998 and amended on February 25, 2000. The amendment provides credit of $45.0 million and extends the expiration to March 26, 2005. Under the terms of the agreement, interest rates on borrowings are based on, at the Company's option, LIBOR or prime rates. The terms of the agreement include a commitment fee based on unutilized amounts and an annual agency fee. Covenants 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 agreement is unsecured and no compensating balances are required. The lenders under the amended February 25, 2000 revolving credit agreement executed a Release and Termination Agreement of the collateral liens granted in the previous amendment.
The Company amended the February 25, 2000 revolving credit agreement to $47,500,000 from $20,000,000 and extended the expiration to February 25, 2003. In addition, the notes under the $17,500,000 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 were based on, at the Company's option, LIBOR, prime or federal funds rates. The terms of the agreement included a commitment fee based on unutilized amounts, an annual agency fee and covenants which provided 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 agreement terms included reductions in the commitment equal to the greater of $4,000,000 or principal amounts of the senior notes paid on each of May 31, 2001 and May 31, 2002. The revolving credit facility, as amended, on February 25, 2000, was collateralized by the Company's trademarks and accounts receivable until such time as the borrowings under the revolving credit agreement were less than $22,500,000 and a certain financial ratio was achieved. The senior note holder and the lenders under the revolving credit agreement entered into an intercreditor agreement which included the pro rata sharing of such collateral. No compensating balances were required.
On April 3, 2000, the Company sold a 39,000 square foot manufacturing, warehousing and office facility in Barrie, Ontario, with a net book value of approximately $442,000 for net proceeds of approximately $804,000. Approximately $627,000 of the proceeds was used to satisfy a mortgage bridge loan on its new facility in Barrie, Ontario purchased on February 22, 2000.
On April 26, 2000, the Company refinanced its purchase money promissory note of $3,822,000 for its property in North Carolina with a five-year $4,523,000 mortgage on the land and buildings. The mortgage includes an interest rate based on LIBOR and terms that provide for the maintenance of certain financial ratios.
On February 13, 2002, the Company sold 13.5 acres of vacant land in Farmingdale, New York for gross proceeds of $3,335,000. The land was included in property, plant and equipment at December 31, 2001, with a book value of $500,000. In connection with this sale, an option was granted to the buyer for the remaining 8.5 acres of improved land and buildings owned by the Company. The option is for a purchase price of no less than $5,000,000 and cannot be exercised before December 1, 2004 or after December 1, 2005.
DISCLOSURES ABOUT CONTRACTUAL OBLIGATIONS
In order to aggregate all contractual commitments as of December 31, 2001 (after giving effect to the extended maturity date of the revolving credit agreement) that affect financial condition and liquidity, the Company has included the following table:
The Company believes that cash flows from operations, cash on hand and amounts available from the credit facility will be sufficient to enable the Company to meet its anticipated cash requirements during 2002. However, there can be no assurance that the combination of cash flow from future operations, cash on hand and amounts available from the credit facility will be sufficient to meet the Company's cash requirements. Additionally, in the event of a decrease in demand for its products or reduced sales, such developments, if significant, would reduce the Company's cash flow from operations and could adversely affect the Company's ability to achieve certain financial covenants under the senior note and revolving credit agreements. If the Company is unable to satisfy such financial covenants, the Company could be required to adopt one or more alternatives, such as reducing or delaying certain operating expenditures and/or delaying capital expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF Issue No. 00-14 "Accounting for Certain Sales Incentives". The issue addresses the recognition, measurement and income statement classification for sales incentives offered voluntarily by a vendor, without charge, to customers that can be used in, or that are exercisable by a customer as a result of a single exchange transaction. In April 2001, the EITF amended the effective date of this issue to coincide with the required implementation date of EITF Issue No. 00-25 and will thus be adopted by the Company on January 1, 2002. The Company has determined that implementation of EITF Issue No. 00-14 will result in the reclassification of certain selling costs from selling and administrative expenses to net sales and is in the process of quantifying the amount of such reclassification. The reclassification will not have any impact on net earnings.
In April 2001, the EITF reached a final consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products", which requires that, unless specific criteria are met, consideration from a vendor to a retailer (e.g., "slotting fees", "cooperative advertising arrangements", "buy downs", etc.) be recorded as a reduction from revenue, as opposed to a selling expense. This consensus is effective for fiscal quarters beginning after December 15, 2001, and will thus be adopted by the Company on January 1, 2002. The Company has determined that implementation of EITF Issue No. 00-25 will result in the reclassification of certain selling costs from selling and administrative expenses to net sales and is in the process of quantifying the amount of such reclassification. The reclassification will not have any impact on net earnings.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that the amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets with finite lives, other than goodwill, be amortized over their useful lives. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company on January 1, 2002. Since the Company did not enter into any business combinations subsequent to June 30, 2001, adoption of SFAS No. 141 did not have an impact on the Company's consolidated financial statements. During 2002, the Company will perform the first of the required SFAS No. 142 impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not determined the effect, if any, that the adoption of SFAS No. 142 will have on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes an accounting standard requiring the recording of the fair value of liabilities associated with the retirement of long-lived assets in the period in which they are incurred. The Company must adopt SFAS No. 143 on January 1, 2003. The Company has not determined the effect, if any, that the adoption of SFAS No. 143 will have on the Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining the fundamental recognition and measurement provisions of that statement. SFAS No. 144 requires that a long-lived asset to be abandoned, exchanged for a similar productive asset or distributed to owners in a spinoff to be considered held and used until it is disposed of. However, SFAS No. 144 requires that management consider revising the depreciable life of such long-lived asset. With respect to long-lived assets to be disposed of by sale, SFAS No. 144 retains the provisions of SFAS No. 121 and requires that discontinued operations no longer be measured on a net realizable value basis and that future operating losses associated with such discontinued operations no longer be recognized before they occur. SFAS No. 144 is effective for all fiscal quarters of fiscal years beginning after December 15, 2001, and therefore was adopted by the Company on January 1, 2002. The adoption did not have a material effect on the Company's consolidated financial statements.
ITEM 7A
ITEM 7A - MARKET RISK SENSITIVE INSTRUMENTS
The market risk inherent in the Company's market risk sensitive instruments is the potential loss arising from material adverse changes in interest rates and foreign currency exchange rates.
INTEREST RATE RISK
The Company's borrowings at December 31, 2001 under the revolving credit agreement 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% increase or decrease in interest rates would increase or decrease annual interest expense by approximately $140,000 at December 31, 2001.
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 (loss). Intercompany transactions between the Company and its foreign subsidiaries are recorded by the foreign subsidiaries in their functional currency. The potential loss resulting from a hypothetical 10% adverse change in the quoted foreign currency exchange rate amounts to approximately $624,000 at December 31, 2001.
FORWARD-LOOKING STATEMENTS
Management's Discussion and Analysis of the Results of Operations and Financial Condition and other sections of this Form 10-K include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 (the "Exchange Act"). All statements other than statements of historical information provided herein are forward-looking statements and may contain information about financial results, economic conditions, trends, certain risks, uncertainties and other factors that could cause actual results to differ materially from any future results implied by such forward-looking statements. Factors that might cause such a difference include, but are not limited to: delays in introducing new products or failure of consumers to accept new products; actions by competitors which may result in mergers, technology improvement or new product introductions; the dependence on certain national chain drug stores, food stores and mass merchandiser relationships due to the concentration of sales generated by such chains; changes in fashion-oriented color cosmetic trends; the effect on sales of lower retailer inventory targets; the effect on sales of political and/or economic conditions; the Company's estimates of costs and benefits, cash flow from operations and capital expenditures; interest rate or foreign exchange rate changes affecting the Company and its market sensitive financial instruments including the Company's qualitative and quantitative estimates as to market risk sensitive instruments; changes in product mix to products which are less profitable; shipment delays; depletion of inventory and increased production costs resulting from disruptions of operations at any of our manufacturing or distribution facilities; foreign currency fluctuations affecting our results of operations and the value of our foreign assets and liabilities; the relative prices at which we sell our products and our foreign competitors sell their products in the same market; our operating and manufacturing costs outside of the United States; changes in the laws, regulations and policies, including changes in accounting standards, that effect, or will effect, us in the United States and/or abroad; and trends in the general economy. Although the Company believes that the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that its expectations will be achieved. Without limitation, use of the following words is intended to identify forward-looking statements: "may," "will," "should," "expect," "anticipate," "estimate," "indications," "intend," "plan," "momentum," or "continue" or the negative thereof or other variations thereon.
Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. In addition to the disclosure contained herein, readers should carefully review any disclosure of risks and uncertainties contained in other documents the Company files or has filed from time to time with the Securities and Exchange Commission pursuant to the Exchange Act.
ITEM 8
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See consolidated financial statements and schedule included separately herein.
ITEM 9
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10
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 2002 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A and is 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, 2001 are as follows:
There is no arrangement or understanding between any executive officer and any other person pursuant to which he was selected as an officer. No family relationship exists among any of the executive officers and directors of the Company.
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.
ITEM 11
ITEM 11 - EXECUTIVE COMPENSATION
The information required is set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 12
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 2002 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 13
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The information required is set forth under the caption "Executive Compensation" in the Company's definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be filed pursuant to Regulation 14A and is incorporated herein by reference.
PART IV
ITEM 14
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 year ended December 31, 2001.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
By /s/ DAN K. WASSONG March 26, 2002 ----------------------- Dan K. Wassong, Chairman, President and Chief Executive Officer
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.
By /s/ DAN K. WASSONG March 26, 2002 ----------------------- Dan K. Wassong, Chairman, President and Chief Executive Officer (Principal Executive Officer)
By /s/ CHARLES J. HINKATY March 26, 2002 ----------------------- Charles J. Hinkaty, Director, Vice President
By /s/ MARTIN E. REVSON March 26, 2002 ----------------------- Martin E. Revson, Director
By /s/ ROBERT A. KAVESH March 26, 2002 ----------------------- Robert A. Kavesh, Director
By /s/ STEVEN KOTLER March 26, 2002 ----------------------- Steven Kotler, Director
By /s/ GEORGE LINDEMANN March 26, 2002 ----------------------- George Lindemann, Director
By /s/ MARCELLA MAXWELL March 26, 2002 ----------------------- Marcella Maxwell, Director
By /s/ ENZO J. VIALARDI March 26, 2002 -----------------------
Enzo J. Vialardi, Executive Vice President, Chief Financial Officer
DEL LABORATORIES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
and Schedule
Independent Auditors' Report
Financial Statements:
Consolidated Balance Sheets as of December 31, 2001 and 2000.
Consolidated Statements of Operations for the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000 and 1999.
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000 and 1999.
Notes to Consolidated Financial Statements.
Schedule:
II Valuation and Qualifying Accounts for the years ended December 31, 2001, 2000 and 1999.
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
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, 2001 and 2000, 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, 2001. 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 auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. 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 February 21, 2002, except as to note 6 which is as of March 26, 2002
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
The accompanying notes are an integral part of the consolidated financial statements.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
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 statement of operations 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 (expense). All intercompany accounts and transactions have been eliminated in consolidation.
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. The Company generally grants credit based upon analysis of the customer's financial position and previously established buying and selling patterns. The Company does not bill customers for shipping and handling costs and, accordingly, classifies such costs as selling and administrative expense. Revenues are recognized and discounts are recorded when merchandise is shipped. Net sales are comprised of gross revenues less returns and trade discounts and allowances. The Company allows customers to return their unsold products when they meet certain criteria as outlined in the Company's trade terms. The Company regularly reviews and revises, as deemed necessary, its estimates of reserves for future sales returns based primarily upon actual return rates by product and planned product discontinuances. The Company records estimated reserves for future sales returns as a reduction of sales, cost of sales and accounts receivable. Returned products which are recorded as inventories are valued based on estimated realizable value. The physical condition and marketability of the returned products are the major factors considered by the Company in estimating realizable value. Actual returns, as well as estimated realizable values of returned products, may differ significantly, either favorably or unfavorably, from estimates if factors such as economic conditions, customer inventory levels or competitive conditions differ from expectations.
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 $1,087,000 and $52,000 as of December 31, 2001 and 2000, 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.
INVENTORIES
Inventories are valued at the lower of cost (principally first-in/first-out) or market value. The Company records adjustments to the cost of inventories based upon its forecasted plans to sell, historical scrap and disposal rates and physical condition of inventories. The components of inventories are as follows:
2001 2000 ---- ----
Raw materials $29,114,398 $26,655,440 Work in process 3,892,868 3,775,309 Finished goods 29,670,413 28,153,452 ----------- ----------- $62,677,679 $58,584,201 =========== ===========
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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
ADVERTISING COSTS AND PROMOTIONAL ALLOWANCES
The Company advertises on television and radio and in magazines. Additionally, the Company has various co-operative advertising programs with retailers. Advertising costs are expensed in the year incurred. Advertising expenses, including co-operative advertising programs were approximately $30,456,000, $27,755,000 and $28,976,000 in 2001, 2000 and 1999, respectively. The Company also has various performance-based arrangements with retailers to reimburse them for all or a portion of their promotional activities related to the Company's products. These arrangements primarily allow customers to take deductions against amounts owed to the Company for product purchases. Estimated accruals for promotions and co-operative advertising programs are recorded in the period in which the related revenue is recognized. The Company regularly reviews and revises the estimated accruals for the projected costs for these promotions. Actual costs incurred by the Company may differ significantly, either favorably or unfavorably, from estimates if factors such as the level and success of the retailers' programs or other conditions differ from our expectations.
RESEARCH AND DEVELOPMENT
The Company expended approximately $5,414,000, $5,292,000 and $5,219,000 in 2001, 2000 and 1999, 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.
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.
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 earnings (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.
STOCK DIVIDENDS
On November 20, 2001, the Company's Board of Directors approved a 5% stock dividend. As a result, 404,510 shares of treasury stock were issued on December 28, 2001 to shareholders of record on December 1, 2001. On November 15, 2000, the Company's Board of Directors approved a 5% stock dividend. As a result, 399,253 shares of treasury stock were issued on December 27, 2000 to shareholders of record on November 30, 2000. On November 15, 1999, the Company's Board of Directors approved a 2% stock dividend. As a result, 162,708 shares of treasury stock were issued on December 28, 1999 to shareholders of record on November 30, 1999. Accordingly, the effects of the 5% stock dividends and 2% stock dividend are reflected in the consolidated balance sheets as of December 31, 2001 and 2000, and the consolidated statements of shareholders' equity for 2001, 2000 and 1999, and the accompanying notes to consolidated financial statements.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
STOCK OPTION PLAN
The Company applies the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25), and related interpretations, in accounting for its fixed plan stock options. Under APB No. 25, compensation expense would be recorded if, on the date of grant, the market price of the underlying stock exceeded its exercise price. As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", the Company applies the accounting prescribed by APB No. 25 and presents the SFAS No. 123 information in the footnotes to its consolidated financial statements.
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.
The recoverability of the excess cost over fair value of assets acquired (goodwill) 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.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
RECLASSIFICATIONS
Certain reclassifications were made to prior year amounts in order to conform to current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") reached a final consensus on EITF Issue No. 00-14 "Accounting for Certain Sales Incentives". The issue addresses the recognition, measurement and income statement classification for sales incentives offered voluntarily by a vendor, without charge, to customers that can be used in, or that are exercisable by a customer as a result of a single exchange transaction. In April 2001, the EITF amended the effective date of this issue to coincide with the required implementation date of EITF Issue No. 00-25 and will thus be adopted by the Company on January 1, 2002. The Company has determined that implementation of EITF Issue No. 00-14 will result in the reclassification of certain selling costs from selling and administrative expenses to net sales and is in the process of quantifying the amount of such reclassification. The reclassification will not have any impact on net earnings.
In April 2001, the EITF reached a final consensus on EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products", which requires that, unless specific criteria are met, consideration from a vendor to a retailer (e.g., "slotting fees", "cooperative advertising arrangements", "buy downs", etc.) be recorded as a reduction from revenue, as opposed to a selling expense. This consensus is effective for fiscal quarters beginning after December 15, 2001, and will thus be adopted by the Company on January 1, 2002. The Company has determined that implementation of EITF Issue No. 00-25 will result in the reclassification of certain selling costs from selling and administrative expenses to net sales and is in the process of quantifying the amount of such reclassification. The reclassification will not have any impact on net earnings.
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method only and that certain acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that the amortization of goodwill be replaced with periodic tests of the goodwill's impairment and that intangible assets with finite lives, other than goodwill, be amortized over their useful lives. The provisions of SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001, and will thus be adopted by the Company on January 1, 2002. Since the Company did not enter into any business combinations subsequent to June 30, 2001, adoption of SFAS No. 141 did not have an impact on the Company's consolidated financial statements. During 2002, the Company will perform the first of the required SFAS No. 142 impairment tests of goodwill and indefinite lived intangible assets as of January 1, 2002. The Company has not determined the effect, if any, that the adoption of SFAS No. 142 will have on the Company's consolidated financial statements.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which establishes an accounting standard requiring the recording of the fair value of liabilities associated with the retirement of long-lived assets in the period in which they are incurred. The Company must adopt SFAS No. 143 on January 1, 2003. The Company has not determined the effect, if any, that the adoption of SFAS No. 143 will have on the Company's consolidated financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Long-Lived Assets" which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", while retaining the fundamental recognition and measurement provisions of that statement. SFAS No. 144 requires that a long-lived asset to be abandoned, exchanged for a similar productive asset or distributed to owners in a spinoff to be considered held and used until it is disposed of. However, SFAS No. 144 requires that management consider revising the depreciable life of such long-lived asset. With respect to long-lived assets to be disposed of by sale, SFAS No. 144 retains the provisions of SFAS No. 121 and requires that discontinued operations no longer be measured on a net realizable value basis and that future operating losses associated with such discontinued operations no longer be recognized before they occur. SFAS No. 144 is effective for all fiscal quarters of fiscal years beginning after December 15, 2001, and therefore was adopted by the Company on January 1, 2002. The adoption did not have a material effect on the Company's consolidated financial statements.
(2) SUPPLEMENTAL CASH FLOW INFORMATION
The following is supplemental information relating to the consolidated statements of cash flows:
2001 2000 1999 ---- ---- ----
Cash transactions: Interest $ 7,741,517 $ 7,919,286 $6,026,000 ============ =========== ========== Income taxes $ 5,703,546 $ 2,008,009 $1,938,000 ============ =========== ========== Non-cash transactions: Income tax benefit arising from stock options exercised $ 602,046 $ 625,156 $ 501,160 ============ =========== ========== Shares tendered to exercise stock options $ 1,674,296 $ 1,381,524 $1,025,298 ============ =========== ========== Financed purchase of Canadian facility $ -- $1,828,000 $ -- ============ =========== ==========
DEL LABORATORIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(3) PROPERTY, PLANT AND EQUIPMENT
The components of property, plant and equipment, at cost, are as follows:
2001 2000 ---- ----
Land $ 2,302,824 $ 2,347,902 Building and building improvements 18,247,704 18,338,695 Machinery and equipment 32,127,200 34,914,509 Furniture and fixtures 6,188,765 9,085,202 ----------- ----------- $58,866,493 $64,686,308 =========== ===========
Depreciation expense for 2001, 2000 and 1999 was $7,623,533, $6,887,237 and $6,446,523, respectively.
(4) INTANGIBLES ARISING FROM ACQUISITIONS
Intangibles arising from acquisitions are as follows:
2001 2000 ---- ---- Non-amortized goodwill relating to acquisitions prior to 1971 $ 6,282,000 $ 6,282,000
Intellectual property rights 8,607,264 9,135,169
Trademarks 450,000 802,950 ----------- ----------- $15,339,264 $16,220,119 =========== ===========
Goodwill represents the excess of the purchase prices paid for companies and product lines over amounts assigned to the fair value of the net tangible assets as well as purchased intellectual property rights and trademarks. Total goodwill 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. In 1998, the Company acquired the intellectual property rights and other assets of the CornSilk brand of facial make-up for approximately $10,900,000 and $1,000,000 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 this acquisition. Under the provisions of this agreement, adjustments to the original purchase price were negotiated. As a result, the intangible assets arising from the acquisition were reduced by approximately $482,000.
The remaining trademarks at December 31, 2001 are the Quencher trademarks acquired in 1984 and are being amortized over 20 years.
Accumulated amortization amounted to $8,228,410, $7,347,566 and $6,466,700 at December 31, 2001, 2000 and 1999, respectively. Amortization expense amounted to $880,844, $880,866 and $906,927 for 2001, 2000 and 1999, respectively.
DEL LABORATORIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
(5) INCOME TAXES
The components of income tax expense (benefit) are as follows:
2001 FEDERAL STATE FOREIGN TOTAL ----------- ----------- ----------- -----------
Current tax $ 8,362,489 $ 492,938 $ 1,090,234 $ 9,945,661 Deferred tax (3,039,908) (541,166) -- (3,581,074) ----------- ----------- ----------- ----------- $ 5,322,581 $ (48,228) $ 1,090,234 $ 6,364,587 =========== =========== =========== ===========
Current tax $ 2,118,814 $ 280,883 $ 650,303 $ 3,050,000 Deferred tax 562,004 (54,004) -- 508,000 ----------- ----------- ----------- ----------- $ 2,680,818 $ 226,879 $ 650,303 $ 3,558,000 =========== =========== =========== ===========
Current tax $ (421,114) $ 101,905 $ 193,209 $ (126,000) Deferred tax (1,199,026) (155,974) -- (1,355,000) ----------- ----------- ----------- ----------- $(1,620,140) $ (54,069) $ 193,209 $(1,481,000) =========== =========== =========== ===========
Total income tax expense (benefit) differed from the statutory rate of 35% for 2001 and 34% for 2000 and 35% for 1999, respectively, of earnings before income taxes, as a result of the following items:
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
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 consolidated balance sheets. Significant components of the Company's deferred tax assets and liabilities as of December 31, are as follows:
At December 31, 2001, a deferred tax asset of $312,000 was recorded on the consolidated balance sheet upon recognizing an additional minimum pension liability (note 7(a)). Such liability, net of the related deferred tax asset, was recorded directly as a component of accumulated other comprehensive loss, in accordance with SFAS No. 87, "Employers' Accounting for Pensions" and SFAS No. 130, "Reporting Comprehensive Income."
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 periods which the deferred tax assets are deductible, management believes it is more likely than not that the Company will realize the benefits of these deductible differences.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(6) LONG-TERM DEBT
2001 2000 ---- ----
9.5% senior notes $ 36,000,000 $40,000,000 Notes payable under revolving credit agreement 25,000,000 41,000,000 Mortgages on land and buildings 5,328,239 5,611,816 ------------ ------------ $ 66,328,239 $86,611,816 Less current portion 4,339,004 4,116,719 ------------ ----------- $ 61,989,235 $82,495,097 ============ ===========
On March 26, 2002, the senior notes were amended and restated. The senior note holder executed a Release and Termination Agreement of the collateral liens granted in the previous amendment. The notes require annual principal repayments of $4,000,000 on May 31, 2002; $8,000,000 on May 31, 2003 and May 31, 2004 and $16,000,000 on May 31, 2005. The amended agreement is unsecured and includes 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 March 26, 2002, the Company amended and restated the revolving credit agreement entered into in December 1998 and amended on February 25, 2000. The amendment provides credit of $45,000,000 and extends the expiration to March 26, 2005. Under the terms of the agreement, interest rates on borrowings are based on, at the Company's option, LIBOR or prime rates. The terms of the agreement include a commitment fee based on unutilized amounts and an annual agency fee. Covenants 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 agreement is unsecured and no compensating balances are required. The lenders under the amended February 25, 2000 revolving credit agreement executed a Release and Termination Agreement of the collateral liens granted in the previous amendment.
The Company amended the February 25, 2000 revolving credit agreement 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, 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 were based on, at the Company's option, LIBOR, prime or Federal funds rates. The terms of the agreement included a commitment fee based on unutilized amounts, an annual agency fee and covenants which provided, among other things, for the maintenance of financial covenants and ratios relating to consolidated net worth, restrictions on cash and dividends, the purchase of treasury stock, and certain other expenditures. The agreement terms also included reductions in the commitment equal to the greater of $4,000,000 or principal amounts of the senior notes paid on May 31, 2002. The revolving credit facility, as amended, was collateralized by the Company's trademarks and accounts receivable until such time as the borrowings under the revolving credit agreement were less than $22,500,000 and a certain financial ratio was achieved. The senior note holder and the lenders under the revolving credit agreement entered into an intercreditor agreement which included the pro rata sharing of such collateral. No compensating balances were required. The weighted-average interest rate at December 31, 2001 was 4.83%.
On February 22, 2000, the Company purchased a 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.
On April 26, 2000, the Company refinanced a purchase money promissory note of $3,822,000 for its property in North Carolina with a five-year $4,523,000 mortgage on the land and buildings. The mortgage includes an interest rate based on LIBOR and terms which provide for the maintenance of certain financial ratios.
The aggregate maturities of long-term debt for each of the four years subsequent to December 31, 2001, (after giving effect to the extended maturity date of the revolving credit agreement) are as follows: 2002, $4,339,004; 2003, $8,355,451; 2004, $8,372,734 and 2005, $45,261,050.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(7) 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 $2,042,000, $243,000 and $166,000 for the years 2001, 2000 and 1999, respectively. Assets held by these plans consist of cash and cash equivalents, fixed income securities consisting of U.S. government and corporate bonds and common stocks. The Company also has a defined benefit supplemental executive retirement plan (SERP) for certain of its executives. The SERP is a non-qualified plan under the Internal Revenue Code. The assets in the SERP trust, which were approximately $4,067,000 and $2,482,000 as of December 31, 2001 and 2000, respectively, are considered assets of the Company, not plan assets and as such, are included in other assets on the accompanying consolidated balance sheets. The assets of the SERP, which consist of cash and cash equivalents and U.S. government bonds, are held-to-maturity securities and, as such, are carried at cost plus accrued interest. The Company contributed $1,450,000 to the SERP trust in 2001; no contribution was made in 2000.
Total pension expense for the years ended December 31, 2001, 2000 and 1999 amounted to approximately $2,488,000, $1,548,000 and $1,696,000, respectively. The change in benefit obligation, change in plan assets and funded status as of December 31, 2001 and 2000 and components of net periodic cost for 2001, 2000 and 1999 of the Company's domestic plans are set forth in the following tables:
DEL LABORATORIES, INC. AND SUBSIDIARIES Notes to Consolidated Financial Statements, Continued
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The weighted-average actuarial assumptions used as of December 31, 2001, 2000 and 1999, respectively, were:
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 2001, 2000 and 1999 were approximately $439,000, $431,000 and $463,000, respectively.
The Company maintains a defined contribution plan for the benefit of its Canadian employees. The costs recognized for 2001, 2000 and 1999 were approximately $53,000, $59,000 and $48,000 in U.S. dollars, respectively.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(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 $300,000 for 2001 and $200,000 for 2000. On October 4, 2001 the Company funded its fiscal 2001 contribution of $300,000 to the Employee Stock Ownership Trust with 21,356 (as restated for 5% stock dividend) treasury shares. As a result, an increase of $35,186 was recorded to additional paid-in capital representing the cost of treasury shares which were less than the market price on that date. On March 1, 2001 the Company funded its fiscal 2000 contribution of $200,000 to the Employee Stock Ownership Trust with 20,792 (as restated for 5% stock dividend) treasury shares. As a result, a reduction of $57,228 was recorded to retained earnings in the first quarter of 2001 representing the cost of treasury shares in excess of the market price on that date. Contributions were not made for 1999. At December 31, 2001, the trust held 538,000 shares of the Company's common stock.
(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 on the first day of the month following the date of hire 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, 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 2001, 2000 and 1999.
(8) 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 2,584,015 shares have been authorized for issuance under the 1994 Plan. At December 31, 2001, 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, if the Committee elects to have a restricted period, 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, 2001, 1,411,544 of the 2,180,703 options outstanding were exercisable under the 1994 Plan, at a weighted-average exercise price of $14.89.
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, 2001, all 98,848 options outstanding under the 1984 Plan were exercised at a weighted-average exercise price of $2.71. No further options will be granted or are outstanding under the 1984 Plan.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, 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). To date, no such appreciation rights were granted. 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:
At December 31, 2001, a total of 2,180,703 shares of common stock were subject to outstanding options under all stock option plans.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company applies APB Opinion No. 25 and related 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:
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 2001, 2000 and 1999, respectively: dividend yields 0%, 0%, and 1.01%; expected lives of 6.2, 6.1, and 5.7 years; risk-free interest rates of 4.92%, 4.72%, and 5.89%; and expected volatility of 48.8%, 45.5%, and 42.2%. The weighted-average fair value of options granted during 2001, 2000 and 1999 were $6.59, $5.91, and $6.15, respectively.
The following table summarizes information about stock options at December 31, 2001:
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, 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, 2001 was $922,250 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, 2001 was $13,000 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.
(9) ACCRUED LIABILITIES
Accrued liabilities at December 31, 2001 and 2000 consisted of the following:
2001 2000 ---- ----
Salaries, wages, commissions and employee benefits $ 6,909,871 $ 5,795,955 Interest 321,878 1,005,350 Advertising and promotion costs 8,053,679 6,679,092 Other 6,724,734 4,923,309 ------------- ----------- $ 22,010,162 $18,403,706 ============= ===========
On June 26, 2001, the Company announced that it would initiate a series of actions resulting in a full closure of the Newark, New Jersey manufacturing facility by the end of the first quarter of 2002. It was estimated that the plant closure would result in the termination of approximately 70 production and clerical employees. Estimated severance, pension curtailment and other exit plan expenses of $226,000 were recorded in the second quarter of 2001. As of December 31, 2001, 51 production and clerical employees were terminated and $187,000 of exit costs were incurred. The Company believes that the accrued exit cost liability of $39,000 at December 31, 2001 is adequate for the balance of costs to be incurred.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(10) EARNINGS (LOSS) PER SHARE
A reconciliation between the numerators and denominators of the basic and diluted earnings (loss) per common share is as follows:
Employee stock options for 1,188,000, 1,461,000 and 1,882,000 shares for 2001, 2000 and 1999, respectively, were not included in the net earnings (loss) per share calculation because their effect would have been anti-dilutive.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various 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.
In September 2001, the Company received notice from the Environmental Protection Agency ("EPA") that it was, along with 81 others, a Potentially Responsible Party regarding a Superfund Site ("the Site") located in Glen Cove, New York. According to the notice received from the EPA, the Company's involvement relates to empty drums coming to the Site in 1977 and 1978. The Company recorded an estimate of $550,000 in selling and administrative expenses during the third quarter of 2001 based on information received from the EPA as to its potential liability for past remediation activities. In October, 2001, the Company became a member of a Joint Defense Group ("the JDG"). The JDG is currently in negotiations with the EPA in order to develop the amount of settlement costs required for all past and future remediation activities. The Company is currently unable to determine such settlement costs, which may or may not be material, or the time period over which the costs may be payable.
The Company leases executive office space, furniture, data processing equipment, transportation equipment and warehouse space under terms of leases expiring through 2007. Rent expense under these operating leases aggregated approximately $2,808,000, $2,302,000 and $2,496,000 in 2001, 2000 and 1999, respectively. The Company's obligations under non-cancelable leases are summarized as follows:
2002 $ 2,743,855 2003 2,059,597 2004 1,640,048 2005 136,346 2006 76,880 Thereafter 18,337 ----------- $ 6,675,063 ===========
(12) 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 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.
The fair value of the senior notes exceeds the carrying value at December 31, 2001 by approximately $2.3 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. 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.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(13) COMPREHENSIVE INCOME (LOSS)
The Company's items of other comprehensive income (loss) include a foreign currency translation adjustment and a minimum pension liability adjustment, net of the related tax effect. The components of accumulated other comprehensive loss at December 31, 2001, 2000, and 1999 are as follows:
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(14) SEGMENT INFORMATION
The Company operates in two segments, Cosmetic and Pharmaceutical, that have been organized by the products and services they offer. The Cosmetic segment's principal products are nail care, nail color, color cosmetics, beauty implements, bleaches and depilatories, personal care products and other related cosmetic items. The Pharmaceutical segment's principal products are proprietary oral analgesics, acne treatment products and first aid products. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of its operating segments based on operating income. Certain assets, including property, plant and equipment and deferred tax assets, are not allocated to the identifiable segments; depreciation of unallocated assets is charged to the Cosmetic segment.
Sales to one customer by the Cosmetic and Pharmaceutical segments combined were 23.0%, 23.9% and 24.8% of consolidated net sales for 2001, 2000 and 1999, respectively, and combined sales to another customer were 11.6%, 11.4% and 10.4% of consolidated net sales for 2001, 2000 and 1999, respectively.
Operating income for 2001 includes a charge of $3,100,000 related to the K-Mart Chapter XI bankruptcy filing. Of this amount, $2,300,000 was charged to the Cosmetic segment and $800,000 was charged to the Pharmaceutical segment.
Two customers accounted for 26.3% and 30.5% of the Company's net accounts receivable at December 31, 2001 and 2000, respectively.
DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
(15) 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, 2001 ----------------------------
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- -------
Net sales $72,738 $87,937 $86,320 $85,684 Cost of goods sold 31,333 38,658 38,255 37,711 Net earnings 1,270 3,315 2,374 2,838 Earnings per common share: Basic $ .15 $ .39 $ .28 $ .33 ======= ======= ======= ======= Diluted $ .15 $ .39 $ .27 $ .32 ======= ======= ======= =======
YEAR ENDED DECEMBER 31, 2001 ----------------------------
FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- -------
Net sales $67,463 $76,732 $77,080 $73,607 Cost of goods sold 29,032 34,403 34,234 32,051 Net earnings 501 1,905 1,174 1,137 Earnings per common share: Basic $ .06 $ .23 $ .14 $ .14 ======= ======= ======= ======= Diluted $ .06 $ .23 $ .14 $ .13 ======= ======= ======= =======
Earnings 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.
(16) SUBSEQUENT EVENT
On February 13, 2002, the Company sold 13.5 acres of vacant land in Farmingdale, New York to an unrelated third party for gross proceeds of $3,335,000. The land was included in property, plant and equipment at December 31, 2001, with a book value of $500,000. In connection with this sale, an option was granted to the buyer for the remaining 8.5 acres of improved land and buildings owned by the Company. The option is for a purchase price of no less than $5,000,000 and cannot be exercised before December 1, 2004 or after December 1, 2005.