10-Q 1 t303514.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007 TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _______ COMMISSION FILE NO. 001-05439 DEL LABORATORIES, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-1953103 -------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 726 REXCORP PLAZA, UNIONDALE, NEW YORK 11556 -------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (516) 844-2020 ------------------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ( ) NO (X) Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer ( ) Accelerated filer ( ) Non-accelerated filer (X) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ( ) NO (X) The number of shares of Common Stock, $.01 par value, outstanding as of July 6, 2007 was 1,000. DEL LABORATORIES, INC. AND SUBSIDIARIES Index Part I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements (Unaudited) Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006 3 Consolidated Statements of Operations for the three months ended March 31, 2007 and 2006 (restated) 4 Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (restated) 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 25 Item 3. Quantitative and Qualitative Disclosures About Market Risks 37 Item 4. Controls and Procedures 38 Part II. OTHER INFORMATION Item 1A. Risks Related to the Company 40 Item 6. Exhibits 40 SIGNATURES 41

~~SUCCESSOR~~DEL ~~PREDECESSOR~~LABORATORIES, ~~PERIOD~~INC. ~~PERIOD~~AND ~~------~~SUBSIDIARIES ~~------~~CONSOLIDATED BALANCE SHEETS March 31, 2007 and December 31, ~~2005~~2006 ~~2004~~(In thousands) (Unaudited) March 31, December 31, 2007 2006 ----------- ------------ ~~(UNAUDITED)~~ ASSETS Current assets: Cash and cash equivalents $ 41,~~121~~275 $ ~~3,873~~42 Accounts receivable, less allowance for doubtful accounts of $01,899 in ~~2005~~2007 and $12,~~726~~113 in ~~2004~~2006 7959,~~636~~287 7861,~~977~~563 Inventories ~~121~~102,~~159~~051 ~~111~~95,~~235~~062 ~~Income taxes receivable 14,310 177~~ Deferred income taxes 2530,~~175~~342 729,~~224~~995 Prepaid expenses and other current assets 46,~~344~~612 36,~~508~~409 ---------- ---------- Total current assets ~~248~~199,~~745~~567 ~~204~~193,~~994~~071 Property, plant and equipment, net 5041,~~107~~400 4644,~~769~~647 Intangibles arising from ~~acquistions~~acquisitions, net ~~263~~252,~~225~~725 7254,~~085~~037 Goodwill ~~146~~145,~~220~~318 6145,~~282~~318 Other assets 2926,~~424~~775 1327,~~743~~662 Deferred income taxes 2021,~~213~~949 625,~~587~~039 ---------- ---------- Total assets $ ~~757~~687,~~934~~734 $ ~~285~~689,~~460~~774 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ ~~2,174~~259 $ ~~501~~165 Accounts payable 4734,~~238~~674 5040,~~530~~127 Accrued liabilities 2749,~~411~~231 1947,~~734~~647 ---------- ---------- Total current liabilities 7684,~~823~~164 7087,~~765~~939 Long-term ~~pension liability~~debt, less current portion 22378,~~143~~630 12370,~~273~~239 ~~Deferred~~Long-term ~~income~~pension ~~taxes 146~~liability,~~494~~ ~~7,836~~less ~~Deferred~~current ~~liability~~portion ~~-- 1~~13,~~405~~512 ~~8% senior subordinated notes~~19,943 ~~net~~Deferred ofliabilities ~~unamortized discount of $~~1,~~133~~506 ~~173~~1,~~867~~492 --Deferred ~~Long-term~~income ~~debt,~~taxes ~~less current portion 198~~99,867 7198,~~233~~455 ---------- ---------- Total liabilities ~~618~~577,~~194~~679 ~~163~~578,~~512~~068 ---------- ---------- Shareholders' equity: ~~Preferred~~Common stock $ .01 par value, ~~authorized~~ 1,000~~,000~~ shares; ~~no shares issued (Predecessor) -- -- Common stock $1 par value,~~ authorized ~~20,000,000~~and ~~shares;~~ issued ~~10,000,000 shares~~ - ~~(Predecessor)~~ -- ~~10,000 Common stock $.01 par value, 4,223,864 shares authorized and issued~~ - ~~(Successor) 42~~ -- Additional paid-in capital ~~142~~144,~~658~~409 9146,~~348~~261 Accumulated other comprehensive income ~~(loss)~~432 ~~262~~421 ~~(2,363)~~Accumulated ~~Retained~~deficit ~~earnings~~ (~~deficit~~Note 6) (334,~~222~~786) ~~110,918 ---------- ---------- 139,740 127,903 Less: Treasury stock at cost, 242,553 shares in 2004 --~~ (534,~~453~~976) ~~Receivables for stock options exercised~~ -- ~~(502)~~ -------~~---~~ ---------- Total shareholders' equity ~~139~~110,~~740~~055 ~~121~~111,~~948~~706 ---------- ---------- Total liabilities and shareholders' equity $ ~~757~~687,~~934~~734 $ ~~285~~689,~~460~~774 ========== ========== The accompanying notes are an integral part of the consolidated financial statements.

-3-

~~SUCCESSOR~~DEL ~~PREDECESSOR~~LABORATORIES, ~~PERIOD~~INC. ~~PERIOD~~AND ~~----------------~~SUBSIDIARIES ~~-------------------------------------~~CONSOLIDATED ~~February~~STATEMENTS 1,OF ~~2005-~~OPERATIONS ~~January~~FOR 1,THE ~~2005-~~THREE ~~January~~MONTHS 1,ENDED ~~2004-~~MARCH ~~March~~ 31, ~~2005~~2007 ~~January~~AND ~~31,~~2006 ~~2005~~(In ~~March~~thousands) (UNAUDITED) MARCH 31, ~~2004~~ ---------~~-----~~ 2007 2006 ---------~~-------~~ ---------~~-----~~ Restated Net sales $ 70104,~~917~~015 $ 1893,~~206~~170 ~~$ 83,065~~ Cost of goods sold 3850,~~730~~921 948,~~718~~528 41--------- --------- Gross profit 53,~~215~~094 44,642 Selling and administrative expenses 2845,~~905~~774 1141,~~475~~419 ~~39,680~~Gain ~~Severance~~on ~~expenses~~pension curtailment (note 108a) --(5,420) -- ~~(10)~~Severance ~~Merger~~ expenses (note 110) ~~3,927~~759 ~~18,974~~146 -- -------- -------- -~~-------~~ Operating income ~~(loss) (645) (21~~11,~~961)~~981 23,~~180~~077 Other income (expense): Interest expense, net (49,~~850~~439) (~~264) (1~~8,~~023~~843) Other income (expense), net ~~170~~4 ~~(232)~~9 ~~(50)~~ -------- -~~-------~~ --------- Earnings (loss) before income taxes (52,~~325)~~546 (225,~~457~~757) ~~1,107~~ Provision for (benefit) from) income taxes (21,~~103)~~067 (242,~~434~~104) ~~427~~ -------- -~~-------~~ --------- Net earnings (loss) $ (31,~~222)~~479 $ 1(3,~~977~~653) ~~$ 680~~ ======== =~~=======~~ ========= The accompanying notes are an integral part of the consolidated financial statements.

-4-

~~SUCCESSOR~~DEL ~~PREDECESSOR~~LABORATORIES, ~~PERIOD~~INC. ~~PERIOD~~AND ~~-----------------~~SUBSIDIARIES ~~----------------------------------------~~CONSOLIDATED ~~February~~STATEMENTS 1,OF ~~2005-~~CASH ~~January~~FLOWS 1,FOR ~~2005-~~THE ~~January~~THREE 1,MONTHS ~~2004-~~ENDED ~~March~~MARCH 31, ~~2005~~2007 ~~January~~AND ~~31,~~2006 ~~2005~~(In thousands) (UNAUDITED) March 31, ~~2004~~ -------------- ------ 2007 2006 ---------- --------~~------~~ Restated Cash flows provided by (used in) operating activities: Net earnings (loss) $ (31,~~222)~~479 $ 1(3,~~977~~653) ~~$ 680~~ Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 24,~~152~~220 ~~748 2~~3,~~043~~651 Amortization of display fixtures 12,~~489~~707 ~~764~~ 2,~~068~~261 Amortization of deferred financing fees and original issue discount ~~425~~762 20658 58Non-cash stock compensation 168 223 Deferred income taxes ~~(837)~~3,368 (132,~~030~~927) --Provision for excess and slow moving inventory 2,581 1,231 Provision for (recovery from) doubtful accounts --(188) 2645 Gain on pension curtailment (315,420) ~~Tax~~-- ~~benefit~~Gain on ~~stock~~sale ~~options~~of ~~exercised~~property -- 57(48) ~~170~~ Other non-cash operating items ~~(552)~~7 ~~219~~39 ~~139~~ Changes in operating assets and liabilities: Accounts receivable 2,489 (6,~~670~~536) ~~5,973 3,859~~ Inventories (~~307) (6~~9,~~063~~466) (81,~~169~~222) Prepaid expenses and other current assets (~~459~~180) ~~(379)~~856 22 Other assets (32,~~292~~733) (13,~~686~~735) ~~(4,910)~~ Accounts payable (35,~~698~~479) ~~405~~ (~~793~~3,237) Accrued liabilities ~~(15,970) 21,720~~ 1,~~082~~064 (913) Deferred ~~liability~~liabilities 14 -- ~~1,367 29~~ Pension liability (net) ~~338~~ (~~330~~898) ~~263~~212 ~~Income taxes receivable / payable (2,510) (11,598) (937)~~ ---------- ---------- ~~----------~~ Net cash ~~provided by (~~used in) operating activities (335,~~113~~505) ~~190~~ (413,~~427~~095) ---------- ---------- ~~----------~~ Cash flows provided by (used in) investing activities: Net proceeds from sale of property 2,771 50 Property, plant and equipment additions (~~783) (797) (2~~1,~~956~~983) ~~Purchase of Del Laboratories, Inc.~~ (~~377~~1,~~233~~871) -- -- ----~~------~~ ---------- ~~----------~~ Net cash provided by (used in) investing activities ~~(378,016)~~788 (~~797) (2~~1,~~956~~821) ---------- ---------- ~~----------~~ Cash flows provided by (used in) financing activities: Principal borrowings ~~(payments)~~ under revolving credit ~~agreement~~facility, net --8,000 ~~(800) 6~~13,~~800~~900 Principal payments under ~~mortgages~~mortgage (15) (2314) ~~(9)~~Payment ~~Principal~~of ~~repayments~~deferred ~~under~~financing ~~term~~fees ~~loan~~-- (~~500~~326) --Distribution --to ~~Repayment~~DLI ofHolding ~~existing~~Corp. ~~debt~~(Note ~~under merger~~ 9(~~69,316~~b)) ~~-- -- Issuance of notes 173,845 -- -- Issuance of term loan 200,000 -- -- Payment of financing and other fees~~ (292,~~305~~020) -- -- Contributed capital ~~138,200~~ -- --40 Payment of capital lease obligations (2932) -- (2831) ~~Proceeds from the exercise of stock options~~ -- ~~12 73 Acquisition of treasury stock~~ -- ~~(57) (166)~~ ----~~------~~ ---------- ~~----------~~ Net cash provided by ~~(used in)~~ financing activities ~~412~~5,~~880~~933 ~~(868) 6~~13,~~670~~569 ---------- ---------- ~~----------~~ Effect of exchange rate changes on cash ~~(7)~~17 ~~(21)~~17 ~~(7)~~ ---------- ---------- ~~----------~~ Net increase (decrease) in cash and cash equivalents 1,~~744~~233 (1,~~496~~330) ~~(720)~~ Cash and cash equivalents at beginning of ~~year~~period ~~2,377~~42 ~~3,873~~ 2,~~113~~602 ---------- ---------- ~~----------~~ Cash and cash equivalents at end of period $ 41,~~121~~275 $ ~~2,377 $~~ 1,~~393~~272 ========== ========== ~~==========~~ Supplemental disclosures: Cash paid for: Interest $ ~~866~~12,052 $ ~~140~~11,568 ~~$ 557~~ Income taxes $ ~~1,152~~572 $ ~~136~~794 ~~$ 1,386~~ Non-cash transactions: ~~Shares~~Equipment ~~tendered~~acquired byunder ~~optionees~~capitalized toleases ~~exercise~~$ ~~stock~~569 ~~options~~ $ -- $The ~~269~~accompanying $notes ~~142~~are an integral part of the consolidated financial statements.

-5- DEL LABORATORIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS) (UNAUDITED) 1. ORGANIZATION AND OTHER MATTERS On January 27, 2005, DLI Acquisition Corp ("Sub"), a Delaware corporation and an affiliate of Kelso & Company ("Kelso"), was merged (the "Merger") with and into Del Laboratories, Inc., a Delaware corporation ("Del" ), pursuant to an Agreement and Plan of Merger, dated July 1, 2004 (the "Merger Agreement"), by and among Sub, Del and DLI Holding Corp., a Delaware corporation. Following the Merger, Del ceased to be a publicly traded company and is now a wholly-owned subsidiary of DLI Holding II Corp., a Delaware corporation which, in turn, is owned by DLI Holding Corp. and is an indirect, wholly-owned subsidiary of DLI Holding LLC, a Delaware limited liability company affiliated with Kelso ("DLI LLC"). In connection with the Merger, Del issued 1,000 common shares with a $.01 par value. Following the completion of the Merger, affiliates of Kelso have the right to designate, directly or indirectly, the board of directors of each of DLI LLC, DLI Holding Corp., DLI Holding II Corp. and Del. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying unaudited consolidated financial statements of Del Laboratories, Inc. and subsidiaries ("the Company") have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. Interim results are not necessarily indicative of results for a full year. A summary of the Company's critical and significant accounting policies are presented in its 2006 Annual Report on Form 10-K. Users of financial information produced for interim periods are encouraged to refer to the footnotes contained in the 2006 Annual Report on Form 10-K when reviewing interim financial results. Since December 31, 2006, there have been no significant changes to the Company's significant accounting policies or to the related assumptions and estimates involved in applying these policies, except as described in the following paragraph. In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB No. 109" ("FIN No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN No. 48 effective January 1, 2007. As a result of the adoption of FIN No. 48, the Company recorded a $1,289 increase in the net liability for unrecognized tax benefits, which as required, was accounted for as an increase to the January 1, 2007 accumulated deficit. In the opinion of management, the accompanying interim consolidated financial statements contain all material adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows of the Company for interim periods. -6- Certain reclassifications were made to prior year amounts in order to conform to the current year presentation. The provision for excess and slow moving inventory, previously included in the consolidated statements of cash flows in inventories as net cash provided by operating activities, has been reclassified as a separate line item, provision for excess and slow moving inventory, in net cash provided by operating activities. 3. RESTATEMENTS The Company's consolidated statement of operations and cash flows for the three months ended March 31, 2006 included in this Quarterly Report on Form 10-Q have been restated, principally as a result of understatements of certain customer liabilities relating to prior financial periods. The understatements of customer liabilities pertained to reserves required for future sales returns and markdowns due to incorrect assumptions and methodology and an accrual required for cooperative and promotional advertising programs. The Company also corrected certain other errors previously considered immaterial individually and in the aggregate. Such restatements were previously disclosed in Note 3 of the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2006. The following table presents the effects of the restatements made to the Company's previously reported consolidated statement of operations for the first quarter of 2006 for the errors described above. STATEMENT OF OPERATIONS DATA Three Months Ended March 31, 2006 ---------------------------------------- AS PREVIOUSLY REPORTED ADJUSTMENTS RESTATED -------- ----------- -------- Net sales $92,125 $ 1,045 (a) $ 93,170 Selling and administrative expenses 41,949 (530)(b) 41,419 Operating income 1,502 1,575 3,077 Loss before taxes (7,332) 1,575 (5,757) Benefit from income taxes (2,823) 719 (c) (2,104) Net loss (4,509) 856 (3,653) (a) Adjustment recorded to reduce the reserves for future sales returns and markdowns and the liability for cooperative and promotional advertising. (b) Adjustment recorded to reduce the liability for cooperative and promotional advertising and for the correction of other immaterial errors. (c) Adjustment recorded to reflect the income tax effect of the adjustments recorded in footnotes (a) and (b). As previously disclosed, the Company was unable to file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 by the required filing date of May 15, 2007 as the Company determined that it was necessary to re-evaluate its customer liabilities pertaining to reserves required for future sales returns and markdowns. The Company has completed this re-evaluation and concluded that immaterial adjustments are required to previously reported amounts and that it has made such corrections through an adjustment (increase) to its customer liability reserves of $209 in the quarter ended March 31, 2007. -7- 4. INVENTORIES The components of inventories were as follows: March 31, December 31, GROSS INVENTORIES 2007 2006 -------- -------- Raw materials $ 57,177 $ 52,803 Work in process 7,883 5,687 Finished goods 80,748 80,896 -------- -------- Total gross inventories 145,808 139,386 Reserve for excess and slow moving inventories 43,757 44,324 -------- -------- Inventories, net $102,051 $ 95,062 ======== ======== Inventories are valued at the lower of cost (principally first-in/first-out) or market value. The Company records an inventory obsolescence reserve to the cost of inventories based upon its forecasted plans to sell or scrap, historical and projected disposal rates and physical condition of the inventories. This reserve is calculated using an estimated obsolescence percentage applied to the inventories based on age, historical trends and requirements to support forecasted sales. In addition, the Company may establish specific reserves for future known or anticipated events. These reserves 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, retailer consolidations, fashion-oriented color cosmetic trends or competitive conditions differ from expectations. In accordance with SFAS No. 151, "Inventory Costs", the Company charged $1,027 to cost of goods sold during the three months ended March 31, 2006 relating to unabsorbed overhead costs in connection with the closure of the Little Falls manufacturing facility (Note 10). 5. INTANGIBLES Trade names have an indefinite life and relate to several of the Company's product lines, including SALLY HANSEN(R), LACROSS(R), N.Y.C. NEW YORK COLOR(R), CORNSILK(R), ORAJEL(R), DERMAREST(R), STYE(TM), GENTLE NATURALS(R) and PRONTO(R). These trade names have indefinite lives and are used in advertising and marketing of the products and are widely recognized and accepted by consumers in the Company's respective markets. Customer relationships are being amortized on a straight-line basis over 20 years. The components of intangibles arising from acquisitions were as follows: MARCH 31, 2007 -------------- GROSS CARRYING ACCUMULATED NET BOOK VALUE AMORTIZATION VALUE -------- -------- -------- Trade names $159,100 $ -- $159,100 Customer relationships 105,000 11,375 93,625 -------- -------- -------- $264,100 $ 11,375 $252,725 ======== ======== ======== DECEMBER 31, 2006 ----------------- GROSS CARRYING ACCUMULATED NET BOOK VALUE AMORTIZATION VALUE -------- -------- -------- Trade names $159,100 $ -- $159,100 Customer relationships 105,000 10,063 94,937 -------- -------- -------- $264,100 $ 10,063 $254,037 ======== ======== ======== -8- Amortization expense was $1,312 for the three months ended March 31, 2007 and 2006. The estimated amortization expense for the years ending December 31, 2007, 2008, 2009, 2010 and 2011 is $5,250 in each of the five years. 6. INCOME TAXES The Company adopted the provisions of FIN No. 48 effective January 1, 2007. As a result of the adoption of FIN No. 48, the Company recorded a $1,289 increase in the net liability for unrecognized tax benefits, which as required, was accounted for as an increase to the January 1, 2007 accumulated deficit. The $1,289 increase in the net liability for unrecognized tax benefits was recorded as a $439 increase in income taxes payable and a $850 increase in net deferred tax liabilities. As of January 1, 2007, the gross amount of the liability for unrecognized tax benefits was $3,675. If these unrecognized tax benefits were recognized, $3,675 would impact the effective tax rate. The Company recognizes interest expense and penalties related to the above unrecognized tax benefits within income tax expense. The Company has accrued interest and penalties of approximately $128 as of March 31, 2007. The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. The number of years that are subject to examination by tax authorities varies depending on the tax jurisdiction. The Company's major taxing jurisdictions include the U.S and Canada. The Company is no longer subject to U.S. federal income tax examinations for years before 2002. The Company's U.S. federal income tax returns for 2002 through January 27, 2005 are currently being examined. With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, the Company and it subsidiaries are no longer subject to income tax audits for years prior to 2000. The Company's estimated tax liability is expected to change during the next 12 months as examinations of its tax returns are completed and the Company files various returns to settle tax liabilities. The Company believes that any additional taxes or related interest over the amounts accrued will not have a material effect on its consolidated financial condition, results of operations or cash flows. However, resolution of these matters involves uncertainties and there can be no assurance with respect to the amount or timing of any additional taxes or related interest. The Company recorded a provision for income taxes of $1,067 during the three months ended March 31, 2007 based on the Company's expected effective tax rate of 41.9% for the year ending December 31, 2007. The increase in the effective income tax rate is primarily due to a greater impact of projected permanent items on foreign book income as compared to the previous year. The Company recorded an income tax benefit of $2,104 (restated) during the three months ended March 31, 2006 based on the Company's expected effective tax rate of 36.5% for the year ended December 31, 2006. A valuation allowance is recorded when management determines that it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies, among other factors, in making this assessment. There was no valuation allowance as of March 31, 2007 and December 31, 2006 as the Company believes it is more likely than not that the net deferred tax assets will be realized. -9- 7. LONG - TERM DEBT Long - term debt consisted of the following: March 31, December 31, 2007 2006 -------- ------------ 8% senior subordinated notes, net of unamortized discount of $859 in 2007 and $897 in 2006, due in 2012 $174,141 $174,103 Senior secured floating rate notes, due in 2011 185,000 185,000 Revolving credit facility 18,000 10,000 Mortgage on land and buildings 1,191 1,194 Obligations under capital leases 557 107 -------- -------- 378,889 370,404 Less current portion 259 165 -------- -------- $378,630 $370,239 ======== ======== The $85,000 asset-based revolving credit facility ("the ABL Credit Facility") requires the Company to enter into interest rate protection agreements to provide interest rate protection for a minimum of 45% of the Company's consolidated funded indebtedness for two years. Effective February 1, 2006, the Company entered into a cap/floor collar agreement (the "Collar") with JPMorgan Chase Bank, N.A to provide the required interest rate protection and to manage its exposure to changes in LIBOR. The Collar is for a notional amount of $100,000, expires on February 1, 2009 and has a cap rate of 5.5% and a floor rate of 4.29%. The Collar has been designated as a cash flow hedge of the variability of the cash flows due to changes in LIBOR and has been deemed to be highly effective. Accordingly, the Company records the fair value of the Collar as an asset or liability on its consolidated balance sheet, and any unrealized gain or loss is included in accumulated other comprehensive income. As of March 31, 2007, the Company recorded a liability of $132 in the accompanying consolidated balance sheet and recorded an after-tax net loss of $83 and an after-tax net gain of $169 in accumulated other comprehensive income during the three months ended March 31, 2007 and 2006, respectively. No hedge ineffectiveness was recorded during the three months ended March 31, 2007 and 2006. On March 31, 2007, the Company entered into a Waiver and Consent to the ABL Credit Facility. Among other things, the Waiver and Consent (i) waived certain Defaults or Events of Default relating to any potential restatement or revision of the Company's consolidated financial statements delivered prior to the date of the Waiver and Consent, and (ii) extended the date on which audited financial statements with respect to the fiscal year ended December 31, 2006, and certain other documents under the ABL Credit Facility, were required to be delivered to April 30, 2007 from March 31, 2007. The Company delivered its audited financial statements for the fiscal year ended December 31, 2006 and all other required documents under the ABL Credit Facility to its lenders on April 30, 2007. On May 15, 2007, the Company entered into a Second Waiver and Consent to the ABL Credit Facility. Among other things, the Second Waiver and Consent (i) waived certain Defaults or Events of Default relating to any potential restatement or revision of the Company's consolidated financial statements delivered prior to the date of the Second Waiver and Consent, and (ii) extended the date on which unaudited financial statements for the three months ended March 31, 2007, and certain other documents under the ABL Credit Facility, were required to be delivered to June 15, 2007 from May 15, 2007. On June 15, 2007, the Company entered into a Third Waiver and Consent to the ABL Credit Facility. Among other things, the Third Waiver and Consent (i) waived certain Defaults or Events of Default relating to any potential restatement or revision of the Company's consolidated financial statements delivered prior to the date of the Third Waiver and Consent, and (ii) extended the date on which unaudited financial statements for the three months ended March 31, 2007, and certain other documents under the ABL Credit Facility, were required to be delivered to July 10, 2007 from June 15, 2007. -10- On June 20, 2007, the Company received (i) a notice of default from Wells Fargo, National Association (the "Subordinated Notes Trustee"), as trustee under the Company's indenture (the "Subordinated Notes Indenture") for the Company's 8% Senior Subordinated Notes due 2012 (the "Subordinated Notes") and (ii) a notice of default from Wells Fargo, National Association (together with the Subordinated Notes Trustee, the "Trustees"), as trustee under the Company's indenture (the "Floating Rate Notes Indenture" and, together with the Subordinated Notes Indenture, the "Indentures") for the Company's Senior Secured Floating Rate Notes due 2011 (the "Floating Rate Notes" and, together with the Subordinated Notes, the "Notes"). Under Section 4.03(a) of the Indentures, the Company was required to file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 (the "Form 10-Q") within the time period specified by the SEC's rules and regulations. The Trustee for each Indenture provided the notice of default to notify the Company that it was in violation of Section 4.03(a) of the respective Indenture as a result of the delay in the filing of the Form 10-Q, as described in Note 3 above, and to demand that the Company remedy the default. Each Indenture provides that the Company has 30 days from receipt of a notice of default to cure such default before an event of default occurs under the Indenture. If an event of default occurs, the respective Trustee or the Holders of 25% in aggregate principal amount of the Subordinated Notes or the Floating Rate Notes, as the case may be, may declare the applicable Notes to be due and payable immediately. The Company has cured the default with respect to each Indenture as of July 6, 2007 by filing this report. In January 2007, the Company entered into a capital lease agreement relating to certain machinery and equipment. The lease is payable in monthly installments of $12, including interest at 6.77%, maturing in June 2011. 8. EMPLOYEE RETIREMENT PLANS (a) PENSION PLANS The Company maintains two non-contributory defined benefit pension plans covering all U.S. eligible employees: the Employees' Pension Plan and the LaCross Pension Plan. The Employees' Pension Plan formula is based on years of service and the employee's compensation during the five years before retirement. The LaCross Pension Plan formula is based on years of service. The LaCross Pension Plan covers former employees of the Company's Newark, New Jersey facility which ceased operations during 2002. As a result of this closure, more than 20% of plan participants in the LaCross Pension Plan were terminated which resulted in a partial termination of the plan. Due to the partial termination of the plan, all affected participants became fully vested in their accrued benefits at their termination date. In November 2006, the Board of Directors of the Company approved the termination of the LaCross Pension Plan. The Company has applied for a determination letter from the Internal Revenue Service for approval of the termination of the LaCross Pension Plan. As a result of the closure of the Company's Little Falls facility (see Note 10 for further information), there was a partial curtailment of the Employees' Pension Plan, resulting in a reduction of the benefit obligation of $1,356, a reduction in the unrecognized net actuarial loss of $362 and the recording of a benefit of $994 during the third quarter of 2006. Effective April 1, 2007 (approved and adopted on January 15, 2007 by the Board of Directors of the Company), the Company amended the Employees' Pension Plan. As a result of this amendment, the plan is closed to new employees and the accrual of future benefits to current employees has been discontinued. All retirement benefits that employees earned as of April 1, 2007 have been fully preserved. Employees' ongoing service with the Company will continue to be credited for vesting purposes. The amendment of the Employees' Pension Plan resulted in a curtailment of the plan. As a result of this curtailment, the Company recorded a reduction in the benefit obligation of $10,285, a reduction in the unrecognized net actuarial loss of $4,865 and a benefit of $5,420 during the first quarter of 2007. -11- Assets held by these plans consist of cash and cash equivalents, fixed income securities consisting of U.S. government and corporate bonds and common stocks. The Company also has a defined benefit supplemental executive retirement plan (SERP) for certain of its executives. The SERP is a non-qualified plan under the Internal Revenue Code. The assets in the SERP trust are considered assets of the Company, not plan assets, and as such, are included in other assets on the accompanying consolidated balance sheets. The assets of the SERP, which consist of cash and cash equivalents, are held-to-maturity securities and, as such, are carried at cost plus accrued interest. COMPONENTS OF NET PERIODIC BENEFIT COST The components of net periodic benefit costs of the Company's domestic plans are set forth in the following tables: Three Months Ended March 31, 2007 EMPLOYEES' LACROSS PENSION PLAN PENSION PLAN SERP ------------ ------------ ---- Service cost $ -- $ -- $ 7 Interest cost 715 16 104 Expected return on plan assets (780) (15) -- Recognized net loss -- -- 30 Curtailment (5,420) -- -- ------- ------- ------- Net periodic cost (benefit) $(5,485) $ 1 $ 141 ======= ======= ======= Three Months Ended March 31, 2006 EMPLOYEES' LACROSS PENSION PLAN PENSION PLAN SERP ------------ ------------ ---- Service cost $ 1,016 $ -- $ 3 Interest cost 716 17 103 Expected return on plan assets (718) (16) -- Recognized net loss -- -- 32 ------- ------- ------- Net periodic cost $ 1,014 $ 1 $ 141 ======= ======= ======= (b) EMPLOYEE 401 (K) SAVINGS PLAN The Company maintains an Employee 401(k) Savings Plan (the "401(k) Plan"). The 401(k) 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 401(k) Plan 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. The Company retains the right to make optional contributions for any plan year. Optional contributions were not made by the Company in 2007 or 2006. The 401(K) plan has been redesigned, effective April 2, 2007, as a result of the Company's amendment of its Employees' Pension Plan. The following represent the material changes to the 401(K) plan: (i) automatic enrollment for all eligible employees; (ii) Company matching contributions of employee's contributions up to 3% of eligible compensation, and 50% of the next 2% contributed; and (iii) a Company additional automatic contribution of 3% of eligible compensation for employees who on April 1, 2007 were at least 50 years of age and had 10 or more years of vesting service. -12- 9. SHAREHOLDERS' EQUITY (a) STOCK-BASED COMPENSATION Effective January 1, 2006, the Company adopted SFAS No. 123(R), "Share-Based Payment". SFAS No. 123(R) requires an entity to recognize the grant-date fair value of stock options and other equity-based compensation issued to employees in the financial statements. The Company adopted SFAS 123(R) using the modified prospective transition method. Accordingly, the Company applied the provisions of SFAS No. 123(R) to all awards granted subsequent to December 31, 2005 and will apply the provisions to awards previously granted to the extent that these awards are subsequently modified, repurchased or cancelled. OPTION INCENTIVE PLAN Effective January 27, 2005, DLI Holding Corp. adopted a new stock option incentive plan (the "Option Incentive Plan"). The Option Incentive Plan provides for grants of two types of options to officers or key employees of the Company: Service Options and Exit Options. Under the Option Incentive Plan, 180,000 options are reserved for issuance which represents approximately 4.3% of the outstanding shares of DLI Holding Corp. common stock as of the effective date of the Merger. Under the Incentive Plan, 33% of the granted options are Service Options and 67% are Exit Options. A summary of option activity under the Option Incentive Plan as of March 31, 2007 and changes during the three months ended March 31, 2007 is presented below: WEIGHTED- WEIGHTED- AVERAGE AVERAGE REMAINING AGGREGATE EXERCISE CONTRACTUAL INTRINSIC SERVICE OPTIONS SHARES PRICE TERM VALUE (1) --------------- ------ ----- ---- --------- Outstanding at December 31, 2006 44,417 $35.00 $ 667 Granted 12,233 50.00 -- Exercised -- -- -- Forfeited -- -- ------- ------- Outstanding at March 31, 2007 56,650 $38.24 9.1 years $ 667 ======= ====== ========= ======= Exercisable at March 31, 2007 21,678 $35.00 8.9 years $ 325 ======= ====== ========= ======= WEIGHTED- WEIGHTED- AVERAGE AVERAGE REMAINING AGGREGATE EXERCISE CONTRACTUAL INTRINSIC EXIT OPTIONS SHARES PRICE TERM VALUE (1) --------------- ------ ----- ---- --------- Outstanding at December 31, 2006 88,833 $35.00 $ 1,333 Granted 24,467 50.00 -- Exercised -- -- -- Forfeited -- -- -- ------- ------- Outstanding at March 31, 2007 113,300 $38.24 9.1 years $ 1,333 ======= ====== ========= ======= (1) The intrinsic value is the amount by which the current market value of the underlying stock exceeds the exercise price of the option. Current market value was developed in consultation with independent valuation specialists. -13- The weighted-average grant-date fair value of Service Options granted during the three months ended March 31, 2007 and 2006 was $16.63 and $13.17, respectively. The weighted-average grant-date fair value of Exit Options granted during the three months ended March 31, 2007 and 2006 was $13.21 and $9.65, respectively. The Company recorded compensation expense of $53 and $168 relating to the Service Options for the three months ended March 31, 2007 and 2006, respectively. The Company has not recorded compensation expense relating to the Exit Options as the Company has determined it is not probable that the performance conditions contained in the Exit Options will be achieved. Compensation expense relating to the fair value of the Exit Options will be measured and recorded upon the occurrence of a change in control. As of March 31, 2007, the total unrecognized compensation cost related to the non-vested Service Options was $425 and the related weighted-average period over which this cost is expected to be recognized is approximately 2.1 years. The fair value of each Service Option was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions in the calculations for the three months ended March 31, 2007: dividend yield 0%; expected life of 2.9 years; risk-free interest rate 4.62%; and expected volatility of 42.5%. The weighted average assumptions used in the calculations for the three months ended March 31, 2006 were: dividend yield 0%; expected life of 3.9 years; risk-free interest rate 4.71%; and expected volatility of 45%. Because the Company's common stock is not publicly traded, the expected volatility used was determined based on an examination of the historical volatility of the stock price of the Predecessor Company; the historical and implied volatility of the stock prices of selected comparable companies and the nature of those companies; and other relevant factors. The fair value of each Exit Option granted was estimated on the date of grant using a lattice-based valuation model with the following weighted average assumptions in the calculations for the three months ended March 31, 2007: dividend yield 0%; expected life of 2.9 years; early exercise factor at the time at which Kelso would sell the Company to generate a multiple of 2.8 times their initial investment; termination rate of 1.5%; risk-free interest rate 4.62%; and expected volatility of 42.5%. The weighted average assumptions used in the calculations for the three months ended March 31, 2006 were: dividend yield 0%; expected life of 3.9 years; early exercise factor at the time at which Kelso would sell the Company to generate a multiple of 2.8 times their initial investment; termination rate of 1.5%; risk-free interest rate 4.71%; and expected volatility of 45%. OVERRIDE UNITS Certain of the Company's executives made an investment in DLI LLC, and have been granted certain profit interests (the "Override Units") in DLI LLC, the indirect parent of the Company. The Override Units have two sub-classes: Operating Units and Value Units. Subject to forfeiture and participation provisions (including the applicable Benchmark Amount of $32.718857) as detailed in the DLI LLC Agreement, the holders of Override Units will have voting rights with respect to their Override Units and shall have the rights with respect to profits and losses of DLI LLC and distributions from DLI LLC as set forth in the DLI LLC Agreement. The Override Units are not convertible into common stock and are not saleable or generally transferable. DLI LLC's board approved 294,486 Override Units, as defined available for grant, of which 201,778 Override Units were granted as of December 31, 2005 and an additional 92,707 Override Units were granted on January 31, 2006. The Override Units were granted to Company executives at no cost to the executives. -14- A summary of the Override Units granted as of March 31, 2007 and changes during the three months ended March 31, 2007 is presented below: GRANT-DATE OPERATING UNITS UNITS FAIR VALUE --------------- ----- ---------- Operating Units subject to forfeiture at December 31, 2006 47,717 $14.30 Granted -- -- Exempt from forfeiture (7,726) 14.37 Forfeited -- -- ------- Operating Units subject to forfeiture at March 31, 2007 39,991 $14.28 ======= ====== GRANT-DATE VALUE UNITS UNITS FAIR VALUE ----------- ----- ---------- Value Units subject to forfeiture at December 31, 2006 196,323 $13.08 Granted -- -- Exempt from forfeiture -- -- Forfeited -- -- ------- Value Units subject to forfeiture at March 31, 2007 196,323 $13.08 ======= ====== Total compensation expense recorded in connection with the Operating Units was $115 and $55 (restated) for the three months ended March 31, 2007 and 2006, respectively. The Company has not recorded compensation expense relating to the Value Units as the Company has determined it is not probable that the performance conditions contained in the Value Units will be achieved. Compensation expense relating to the fair value of the Value Units will be measured and recorded upon the occurrence of a change in control. As of March 31, 2007, the total unrecognized compensation cost related to Operating Units subject to forfeiture was $495 and the related weighted-average period over which this cost is expected to be recognized is approximately 1.3 years. In accordance with APB No. 25, the fair value of each Operating Unit and Value Unit granted prior to January 1, 2006 was estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each Operating Unit granted subsequent to January 1, 2006 was estimated on the date of grant using the Black-Scholes option-pricing model. The fair value of each Value Unit granted subsequent to January 1, 2006 was estimated on the date of grant using a lattice-based valuation model. (b) STOCK REPURCHASE On February 15, 2007, DLI Holding Corp. and DLI LLC entered into an Equity Settlement Agreement (the "Equity Settlement Agreement") with William McMenemy, a director and former officer of the Company. Pursuant to the Equity Settlement Agreement, DLI Holding Corp. agreed to pay Mr. McMenemy a total of $2,020 to repurchase (i) 571.42 shares of the common stock of DLI Holding Corp. (the "Shares") and (ii) options to purchase 134,821 shares of the common stock of DLI Holding Corp. ("the Options"). The payment was funded by the Company through a distribution. Also in connection with this transaction, Mr. McMenemy agreed to forfeit the 5,454.42 operating units he held in DLI LLC. The Shares were repurchased pursuant to the terms of the Transition Arrangements Agreement, dated as of August 15, 2005, among Mr. McMenemy, DLI Holding Corp. and DLI LLC. The Options were repurchased pursuant to the Rollover Stock Option Agreement, dated as of January 27, 2005, between DLI Holding Corp. and Mr. McMenemy. The Shares, the Options, and the operating units in DLI LLC constituted Mr. McMenemy's entire equity interest in the Company and its affiliates. -15- (c) SALE OF STOCK On May 18, 2007, certain key employees and advisers of the Company purchased a total of 40,711 shares of the common stock of DLI Holding Corp. for an aggregate purchase price of $1,425. 10. RESTRUCTURING AND SEVERANCE In August 2005, the Company announced a workforce reduction program implemented in September 2005 to streamline the Company's organization and reduce costs. Additional severance costs of $598 and $116 were recorded during fiscal 2006 and in the first quarter of 2007, respectively, of which $680 was paid as of March 31, 2007. The balance has been paid as of May 31, 2007. On January 13, 2006, the Company announced that it planned to cease the manufacturing activities at its facility in Little Falls, New York. The Company transferred a majority of these manufacturing operations to its Rocky Point, North Carolina manufacturing facility and outsourced the remainder. The Company has converted the Little Falls facility to a warehouse to store a portion of its inventory and is in the process of closing several of its short-term leased warehouse facilities in upstate New York. Pursuant to the Company's formal severance policy, a charge of $1,243 for severance costs and related benefits for approximately 289 employees was recorded in December 2005 in accordance with SFAS No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS No. 112"). Additional severance benefits earned for future services by employees being terminated were recognized as a charge in the consolidated financial statements as such severance benefits were earned. During the three months ended March 31, 2006, a charge of $102 was recorded for such earned benefits, in addition to an adjustment of $44 to the initial accrual. Also during the three months ended March 31, 2006, the Company recorded charges to cost of goods sold of $107, related to moving costs for relocated inventory, break down, moving and start-up costs associated with equipment transfers and other related charges. As of March 31, 2007, $1,387 of severance benefits has been paid and all employees have been terminated. During 2007, $13 of relocation costs was expensed as incurred. All remaining cash payments relating to severance costs and related benefits have been paid as of June 30, 2007. A summary of the activity in the accrual for the Little Falls restructuring is as follows: Balance at December 31, 2006 $ 188 Provision -- Payments (166) ----- Balance at March 31, 2007 $ 22 ===== -16- On February 12, 2007, the Company announced plans to transfer the manufacturing activities currently performed at its plant in Canajoharie, New York (the "Canajoharie Plant") to independent contractors in North Carolina. The transfer resulted in the termination of approximately 71 employees, which was conducted in phases which began in mid April 2007, and was completed as of June 30, 2007. The Company is currently listing the Canajahorie Plant for sale. Pursuant to the Company's formal severance policy, a charge of $643 for severance costs and related benefits was recorded during the first quarter of 2007 in accordance with SFAS No. 112. Additional severance benefits earned for future services by employees being terminated will be recognized as a charge in the consolidated financial statements as such severance benefits are earned. The Company estimates that approximately $63, all in the Cosmetic segment, will be incurred for additional severance costs during 2007. Cash payouts are expected to be completed by the end of 2007. As of March 31, 2007, no employees have been terminated and no severance benefits have been paid. 11. COMPREHENSIVE INCOME (LOSS) The components of comprehensive income (loss) were as follows:

~~SUCCESSOR~~THREE ~~PREDECESSOR~~MONTHS ~~PERIOD~~ENDED ~~PERIOD~~MARCH ~~------------ --------------------------- Feb 1, 2005- Jan 1, 2005- Jan 1, 2004- Mar~~ 31, ~~2005~~2007 ~~Jan~~2006 ~~31, 2005 Mar 31, 2004~~ ----~~--------~~ ----~~--------~~ ~~------------~~Restated Net earnings (loss), as$ ~~reported~~1,479 $ (3,~~222~~653) $Other ~~1,977~~comprehensive $income ~~680~~(loss) ~~Deduct:~~Foreign ~~Total~~currency ~~stock-based~~translation ~~employee~~gain ~~compensation~~/ ~~expense~~(loss) ~~determined~~94 ~~under~~(63) Change in fair value ~~based~~of ~~method~~interest ~~for~~rate ~~all~~Collar, ~~awards~~ net of ~~related~~taxes ~~tax effects $ -- $~~ (~~125~~83) $169 ~~(524)~~ -------- -------- ~~--------~~Total ~~Pro~~comprehensive ~~forma~~income ~~net earnings~~ (loss) $ 1,490 $(3,~~222~~547) ~~$ 1,852 $ 156~~ ======== =======~~= ========~~

-17- 12. SEGMENT INFORMATION The Company operates in two segments, Cosmetic and Pharmaceutical that have been organized by the products 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, oral hygiene, eye/ear 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. THREE MONTHS ENDED MARCH 31, 2007 2006 ---- ---- Restated Net sales: Cosmetic $ 80,334 $ 73,266 Pharmaceutical 23,681 19,904 --------- --------- Consolidated $ 104,015 $ 93,170 ========= ========= Operating income(1): Cosmetic $ 7,500 $ 1,411 Pharmaceutical 4,481 1,666 --------- --------- Consolidated 11,981 3,077 Other income (expense): Interest expense, net (9,439) (8,843) Other income (expense), net 4 9 --------- --------- Income (loss) before income taxes $ 2,546 $ (5,757) ========= ========= Depreciation and amortization: Cosmetic $ 3,385 $ 2,865 Pharmaceutical 835 786 --------- --------- Consolidated $ 4,220 $ 3,651 ========= ========= Amortization of display fixtures: Cosmetic $ 2,707 $ 2,261 Pharmaceutical -- -- --------- --------- Consolidated $ 2,707 $ 2,261 ========= ========= (1) Operating income for the three months ended March 31, 2007 and 2006 includes severance expense of $759 and $146, respectively, which was all charged to the Cosmetic segment. The pension curtailment gain of $5,420 for the three months ended March 31, 2007 was allocated $4,287 to the Cosmetic segment and $1,133 to the Pharmaceutical segment. 13. SALE OF PROPERTY In January 2007, the Company sold land and buildings located in Little Falls, New York to an unrelated third party for gross proceeds of $2,999, less $228 in closing costs and leased back the properties for a six year term. The land and buildings had a net book value of $3,118 as of December 31, 2006. In connection with this sale, the Company recorded an impairment loss of approximately $347 in fiscal 2006. In June 2007, the Company sold land and buildings located in Newark, New Jersey to an unrelated third party for gross proceeds of $575, less $45 in closing costs. The land and buildings had a net book value of $400, resulting in a gain on the sale of approximately $130. -18- (14) Condensed Consolidating Financial Information The Company's obligations related to its ABL Credit Facility, Floating Rate Notes and Subordinated Notes are guaranteed jointly and severally by the Company's direct and indirect present and future domestic restricted subsidiaries (the "Guarantors"). The following financial information sets forth, on a condensed consolidating basis, balance sheets, statements of operations and statements of cash flows for domestic subsidiaries of the Company that are Guarantors (collectively, the "Guarantor Subsidiaries") and foreign subsidiaries of the Company that are not Guarantors (collectively, the "Non-Guarantor Subsidiaries"). The accounting policies of the Issuer, Guarantor Subsidiaries and the Non-Guarantor Subsidiaries are the same as those described for the Company in the 2006 Annual Report on Form 10-K. See Note 3 for information relating to the restatements.

~~SUCCESSOR~~CONSOLIDATING ~~PREDECESSOR~~BALANCE ~~PERIOD~~SHEET ~~PERIOD~~March 31, 2007 GUARANTOR NON-GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ ~~Feb~~ASSETS Current assets: Cash and cash equivalents $ 1,368 ~~2005~~$ (517) $ 424 $ -- ~~Jan~~$ 1,275 ~~2005~~Accounts receivable 47,622 8,198 3,467 -- ~~Jan~~59,287 Inventories 82,102 8,544 11,869 (464) 102,051 Deferred income taxes 24,217 5,083 1,042 ~~2004~~-- ~~Mar 31~~30,342 ~~2005~~Prepaid ~~Jan~~expenses 31and other current assets 3,597 ~~2005~~473 ~~Mar~~2,542 31-- 6,612 ~~2004~~--------- --------- --------- --------- --------- Total current assets 158,906 21,781 19,344 (464) 199,567 Property, plant and equipment, net 36,119 1,549 3,732 -- 41,400 Intercompany 135,439 (116,106) (19,333) -- -- Intangibles arising from acquisitions, net 167,403 85,322 -- -- 252,725 Goodwill 92,858 47,460 5,000 -- ~~Net~~145,318 ~~earnings~~Other assets 25,027 -- 1,748 -- 26,775 Note receivable 6,430 -- -- (~~loss~~6,430) -- Deferred income taxes 21,683 -- 266 -- 21,949 --------- --------- --------- --------- --------- Total assets $ 643,865 $ 40,006 $ 10,757 $ (36,~~222~~894) $ 687,734 ========= ========= ========= ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 198 $ -- $ 61 $ -- $ 259 Accounts payable 28,139 3,383 3,152 -- 34,674 Accrued liabilities 40,406 6,200 2,625 -- 49,231 --------- --------- --------- --------- --------- Total current liabilities 68,743 9,583 5,838 -- 84,164 Long-term debt, less current portion 377,500 -- 1,~~977~~130 -- 378,630 Long-term pension liability, less current portion 13,512 -- -- -- 13,512 Deferred liabilities 1,506 -- -- -- 1,506 Deferred income taxes 66,540 33,191 136 -- 99,867 Note payable -- -- 6,430 (6,430) -- --------- --------- --------- --------- --------- Total liabilities 527,801 42,774 13,534 (6,430) 577,679 --------- --------- --------- --------- --------- Shareholders' equity: Common stock $.01 ~~680~~par ~~Foreign~~value, ~~currency~~authorized ~~translation~~1,000 ~~gain~~shares; /issued 1,000 shares -- -- -- -- -- Additional paid-in capital 144,404 -- 5 -- 144,409 Accumulated other comprehensive income (loss) ~~262~~(344) -- 776 -- 432 Accumulated deficit (~~346~~27,996) (~~165~~2,768) (3,558) (464) (34,786) --------- --------- --------- --------- --------- Total ~~comprehensive~~shareholders' ~~income~~equity 116,064 (~~loss~~2,768) $ (2,~~960~~777) (464) 110,055 --------- --------- --------- --------- --------- Total liabilities and shareholders' equity $ 1643,~~631~~865 $ ~~515~~40,006 $ 10,757 $ (6,894) $ 687,734 ========= ========= ========= ========= =========

-19-

~~SUCCESSOR~~CONSOLIDATING ~~PREDECESSOR~~BALANCE ~~PERIOD~~SHEET ~~PERIOD~~DECEMBER 31, 2006 GUARANTOR NON-GUARANTOR ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED ------ ------------ ------------ ------------ ------------ ~~Feb~~Current 1,assets: ~~2005~~Cash and cash equivalents $ 343 $ (599) $ 298 $ -- ~~Jan~~$ 142 Accounts receivable, ~~2005-~~net ~~Jan~~49,088 19,799 ~~2004~~2,676 -- ~~Mar~~61,563 31Inventories 76,445 ~~2005~~8,755 ~~Jan~~10,331 31(469) 95,062 ~~2005~~Deferred ~~Mar~~income 31taxes 24,008 ~~2004~~4,955 1,032 -- 29,995 Prepaid expenses and other current assets 3,457 494 2,458 -- 6,409 --------- --------- --------- --------- --------- ~~Net~~Total ~~sales:~~current ~~Cosmetic~~assets $153,341 5523,~~387~~404 $16,795 14(469) 193,~~756~~071 $Property, 65plant and equipment,~~238~~ ~~Pharmaceutical~~net 1539,~~530~~262 1,638 3,~~450~~747 17-- 44,~~827~~647 Intercompany 134,931 (116,585) (18,346) -- -- Intangibles arising from acquisitions, net 168,118 85,919 -- -- 254,037 Goodwill 92,858 47,460 5,000 -- 145,318 Other assets 25,801 1 1,860 -- 27,662 Note receivable 6,430 -- -- (6,430) -- Deferred income taxes 24,776 -- 263 -- 25,039 --------- ~~Consolidated~~--------- --------- --------- --------- Total assets $ 70645,~~917~~517 $ 1841,~~206~~837 $ 839,~~065~~319 $ (6,899) $ 689,774 ========= ========= ========= ~~Operating~~========= ~~income~~========= ~~(loss)~~LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: ~~Cosmetic~~Current portion of long-term debt $ ~~(2,812)~~105 $~~(17,714)~~ -- $ ~~342~~60 ~~Pharmaceutical~~$ -- $ 165 Accounts payable 33,904 3,746 2,~~167~~477 (4-- 40,~~247)~~127 1Accrued liabilities 38,~~838~~334 6,794 2,519 -- 47,647 --------- --------- --------- ~~Consolidated~~--------- $--------- ~~(645)~~Total ~~$(21~~current liabilities 72,~~961)~~343 $10,540 25,~~180~~056 ~~Other~~-- ~~income~~87,939 ~~(expense):~~Long-term ~~Interest~~debt, ~~expense~~less current portion 369,105 ~~net~~-- $1,134 (4-- 370,~~850)~~239 $Long-term ~~(264)~~pension $liability, (less current portion 19,943 -- -- -- 19,943 Deferred liabilities 1,~~023)~~492 ~~Other~~-- -- -- 1,492 Deferred income ~~(expense)~~taxes 65,964 ~~net~~32,356 ~~170~~135 $-- ~~(232)~~98,455 $Note payable -- -- 6,430 (506,430) -- --------- --------- --------- ~~Earnings~~--------- ~~(loss)~~--------- ~~before~~Total ~~income~~liabilities ~~taxes~~528,847 $42,896 (512,~~325)~~755 $(226,~~457~~430) ~~$ 1~~578,~~107~~068 ~~========~~--------- ~~========~~--------- ~~========~~--------- ~~Depreciation~~--------- ~~and~~--------- ~~amortization~~Shareholders' equity: ~~Cosmetic~~Common $stock ~~1,679~~ $.01 ~~707~~par $value, 2authorized 1,~~040~~000 ~~Pharmaceutical~~shares; ~~473~~issued 411,000 3shares -- -- -- -- -- Additional paid-in capital 146,256 -- 5 --- 146,261 Accumulated other comprehensive income (loss) (260) -- 681 --~~----~~ ~~Consolidated~~421 $Accumulated 2deficit (29,~~152~~326) $(1,059) ~~748~~(4,122) $(469) 2(34,~~043~~976) ~~========~~--------- ~~========~~--------- ~~========~~--------- ~~Amortization~~--------- of--------- ~~display~~Total ~~fixtures:~~shareholders' ~~Cosmetic~~equity $116,670 (1,~~489~~059) $(3,436) ~~764~~(469) ~~$ 2~~111,~~068~~706 ~~Pharmaceutical~~ -- ------- --------- --------- --------- --------- ~~Consolidated~~Total liabilities and shareholders' equity $ 1645,~~489~~517 $ ~~764~~41,837 $ 29,~~068~~319 $ (6,899) $ 689,774 ========= ========= ========= ========= =========

-20-

~~Guarantor~~CONSOLIDATING ~~Non~~STATEMENT OF OPERATIONS Three Months Ended March 31, 2007 GUARANTOR NON-~~Guarantor~~GUARANTOR ~~Issuer~~ISSUER ~~Subsidiaries~~SUBSIDIARIES ~~Subsidiaries~~SUBSIDIARIES ~~Eliminations~~ELIMINATIONS ~~Consolidated~~CONSOLIDATED ------ ------------ ------------ ------------ ------------ ~~ASSETS~~Net ~~Current~~sales ~~assets: Cash and cash equivalents~~ $ 571,~~070~~187 $ (122,~~253)~~579 $ ~~304~~10,249 $ -- $ 4104,~~121~~015 ~~Accounts~~Cost ~~receivable~~of ~~58,081~~goods ~~16,686~~sold 439,~~869~~775 ~~-- 79~~6,~~636~~720 ~~Inventories 96~~4,~~564~~431 ~~10,830 13,765 -- 121,159 Income taxes receivable 14,310 -- -- -- 14,310 Deferred income taxes 25,530~~ (~~355~~5) ~~-- -- 25~~50,~~175~~921 ~~Prepaid expenses and other current assets 3,790 489 65~~ -- ~~4,344~~ -------~~---~~ ---------- ---------- ---------- ---------- ~~Total~~Gross ~~current~~profit ~~assets 203~~31,~~345~~412 2615,~~397~~859 195,~~003~~818 --5 ~~248~~53,~~745~~094 ~~Property,~~Selling ~~plant~~ and ~~equipment,~~administrative ~~net~~expenses 4523,~~574~~533 ~~983~~17,096 35,~~550~~145 -- 5045,~~107~~774 ~~Intercompany~~Gain ~~100,167~~on ~~(88,369)~~pension curtailment (115,~~798~~420) -- -- ~~Intangibles arising from acquisitions, net 173,118 90,107~~ -- ~~-- 263~~(5,~~225~~420) ~~Goodwill~~Severance ~~110,334~~expenses ~~35,886~~759 -- -- ~~146,220 Other assets 28,635 10 779~~ -- ~~29,424~~759 ~~Note receivable 6,430~~ -- -- ~~(6,430)~~ -- ~~Deferred income taxes 55,866 (35,653)~~ -- -- ~~20,213~~ ---------- ---------- ---------- ---------- ~~----------~~Operating ~~Total~~income ~~assets~~(loss) ~~$ 723~~12,~~469~~540 ~~$ 29,361 $ 11,534 $~~ (61,~~430~~237) $673 ~~757~~5 11,~~934~~981 ~~==========~~Other ~~==========~~income ~~========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities~~(expense): ~~Current~~Interest ~~portion of long-term debt $ 2~~expense,~~122~~ $net ~~-- $ 52 $ -- $ 2~~(9,~~174~~291) ~~Accounts~~113 ~~payable~~(261) ~~41,250 3,397 2,591~~ -- 47(9,~~238~~439) ~~Accrued~~Other ~~liabilities~~income 23(expense),~~006~~ ~~2,847~~net ~~1,558 -- 27,411 Income taxes payable~~ (~~21,682~~61) ~~22,710~~ (1~~,028~~) --66 -- 4 ---------- ---------- ---------- ---------- ---------- ~~Total~~Earnings ~~current~~(loss) ~~liabilities~~before ~~44,696~~income ~~28,954~~taxes 3,~~173~~188 ~~-- 76~~(1,~~823~~125) ~~Long-term~~478 ~~pension~~5 ~~liability~~2,546 ~~less~~Provision ~~current~~for ~~portion~~(benefit ~~22,143~~from) ~~-- -- -- 22,143 Deferred~~ income taxes ~~146~~1,~~359~~590 ~~122~~(437) ~~13 -- 146,494 Deferred liability -- -- -- -- -- Note payable -- -- 6,430~~ (~~6,430~~86) -- ~~8% senior notes 173,867 173,867 Long-term debt, less current portion 197,675 --~~ 1,~~192~~067 ~~198,867~~ ---------- ---------- ---------- ---------- ---------- ~~Total~~Net ~~liabilities~~earnings ~~584,740 29,076 10,808~~ (~~6,430~~loss) ~~618,194 ---------- ---------- ---------- ---------- ---------- Shareholders' equity: Common stock~~ $~~.01~~ ~~par value~~1,598 ~~authorized~~$ ~~4,223,864 shares; issued 4,223,864 shares 42 -- -- -- 42 Additional paid-in capital 142,658 -- -- -- 142,658 Accumulated other comprehensive loss~~ (7688) -- 269 -- 262 Retained earnings (3,964) 285 457 -- (3,222) ---------- ---------- ---------- ---------- ---------- Total shareholders' equity 138,729 285 726 -- 139,740 ---------- ---------- ---------- ---------- ---------- Total liabilities and shareholders' equity $ ~~723,469~~564 $ ~~29,361~~5 $ 111,~~534~~479 ~~$ (6,430) $ 757,934~~ ========== ========== ========== ========== ==========

-21-

~~Guarantor~~CONSOLIDATING ~~Non-Guarantor~~STATEMENT ~~Issuer~~OF ~~Subsidiaries~~OPERATIONS ~~Subsidiaries~~Three ~~Eliminations~~Months ~~Consolidated~~Ended ~~------~~March ~~------------ ------------ ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3~~31,~~607~~ $2006 ~~(398)~~Restated $GUARANTOR ~~664 $~~ NON--GUARANTOR $ISSUER ~~3,873~~SUBSIDIARIES ~~Accounts~~SUBSIDIARIES ~~receivable,~~ELIMINATIONS ~~net~~CONSOLIDATED ~~58,062 17,016 3,899~~ -- ~~78,977 Inventories 87,410 11,805 12,020~~ -- ~~111,235 Income taxes receivable 177~~ -- -- -- ~~177 Deferred income taxes 7,075 149~~ -- -- ~~7,224 Prepaid expenses and other current assets 3,065 325 118~~ -- ~~3,508~~ --~~-------~~ --------- ---~~-----~~ --------- ---~~------~~ ~~Total current assets 159,396 28,897 16,701~~ -- ~~204,994 Property, plant and equipment, net 42,094 996 3,679~~ -- ~~46,769 Intercompany (103,361) 105,837 (951) (1,525)~~ -- ~~Intangibles arising from acquisitions, net 7,080 5~~ -- -- ~~7,085 Goodwill 3,520 2,762~~ -- --Net ~~6,282~~sales ~~Other assets 13,195 18 530 -- 13,743 Note receivable 6,430 -- -- (6,430) -- Deferred income taxes 6,301 286 -- -- 6,587 --------- --------- -------- --------- --------- Total assets~~ $ ~~134~~64,~~655~~763 $ ~~138~~18,~~801~~795 $ 199,~~959~~612 $-- ~~(7,955)~~ $ ~~285~~93,~~460~~170 ~~=========~~Cost ~~========= ======== ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion~~ of ~~long-term~~goods ~~debt~~sold ~~$ 450 $ -- $ 51 $ -- $ 501 Accounts payable 46~~38,~~283~~176 35,~~000~~933 ~~1,247 -- 50,530 Accrued liabilities 14,192~~ 4,~~186~~419 ~~1,356~~ -- 1948,~~734~~528 ~~Income taxes payable (21,865) 22,360 (495)~~ -- -- ----~~-----~~ --------- -------- --------- --------- ~~Total~~Gross ~~current~~profit ~~liabilities 39~~26,~~060~~587 2912,~~546~~862 25,~~159~~193 -- 7044,~~765~~642 ~~Long-term~~Selling ~~pension~~and ~~liability,~~administrative ~~less~~expenses ~~current portion 12~~22,~~273~~366 ~~-- -- -- 12~~14,~~273~~436 ~~Deferred income taxes 7~~4,~~619~~617 ~~204 13~~ -- 741,~~836~~419 ~~Deferred~~Severance ~~liability~~expenses ~~1,405~~146 -- -- -- ~~1,405~~146 ~~Note payable~~ -- -- ~~6,430 (6,430)~~ -- ~~Long~~-~~term debt, less current portion 70,018~~ -- ~~1,215~~ -- ~~71,233~~ ------~~---~~ --------- -------- --------- ~~---------~~Operating ~~Total~~income ~~liabilities 130,375 29,750 9,817~~ (~~6,430~~loss) ~~163~~4,~~512~~075 ~~--------- --------- -------- --------- --------- Shareholders' equity: Preferred stock $ .01 par value, authorized~~ (1,~~000,000~~574) ~~shares;~~576 ~~no shares issued~~ -- ~~-- -- -- -- Common stock $1 par value~~3,077 ~~authorized~~Other ~~20,000,000~~income ~~shares; issued 10,000,000 shares 10,016 1 2~~ (19expense): ~~10,000~~Interest ~~Additional paid-in capital 9~~expense,~~348~~ ~~1,000~~net 5 (18,~~005~~777) ~~9,348~~-- ~~Accumulated other comprehensive loss~~ (~~3,844~~66) ~~(38) 1,519~~ -- (28,~~363~~843) ~~Retained~~Other ~~earnings~~income (~~5,285~~expense) ~~108~~,~~088~~ ~~8,616~~net 28 (~~501~~2) ~~110,918~~(17) -- 9 -------- --------- -------- --------- --------- ~~10,235~~Earnings ~~109,051 10,142~~ (~~1,525~~loss) ~~127,903~~before ~~Less:~~income ~~Treasury~~taxes ~~stock at cost~~(4,674) ~~242,553 shares in 2004~~ (51,~~453~~576) --493 -- -- (5,~~453~~757) ~~Receivables~~Provision for ~~stock~~(benefit ~~options~~from) ~~exercised~~income taxes (~~502~~1,704) ~~-- -- --~~ (~~502~~541) ~~---------~~141 --~~-------~~ ~~-------- --------- --------- Total shareholders' equity 4,280 109,051 10,142~~ (12,~~525~~104) ~~121,948~~ --------- --------- -------- --------- --------- ~~Total~~Net ~~liabilities~~earnings ~~and~~(loss) ~~shareholders' equity~~ $ ~~134~~(2,~~655~~970) $ ~~138~~(1,~~801~~035) $ ~~19,959~~352 $-- $ (73,~~955~~653) ~~$ 285,460~~ ========= ========= ======== ========= =========

-22-

~~Guarantor~~CONSOLIDATING ~~Non~~STATEMENT OF CASH FLOWS Three Months Ended March 31, 2007 GUARANTOR NON-~~Guarantor~~GUARANTOR ~~Issuer~~ISSUER ~~Subsidiaries~~SUBSIDIARIES ~~Subsidiaries~~SUBSIDIARIES ~~Eliminations~~ELIMINATIONS ~~Consolidated~~CONSOLIDATED ------ ------------ ------------ ------------ ------------ Cash flows from operating activities: Net ~~sales~~earnings (loss) $ 481,~~551~~598 $ ~~15,432~~(688) $ ~~6,934~~564 $ 705 $ 1,~~917~~479 ~~Cost~~Adjustments ofto ~~goods~~reconcile ~~sold~~net 30earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,~~698~~277 857 85 1 4,~~468~~220 Amortization of display fixtures 2,583 -- 124 -- 2,707 Amortization of deferred financing fees and original issue discount 762 -- -- -- 762 Non-cash stock compensation 168 -- -- -- 168 Deferred income taxes 3,~~564~~682 38(314) -- -- 3,~~730~~368 ~~Selling~~Provision for excess and ~~administrative~~slow ~~expenses~~moving 16inventory 1,~~391~~901 9354 326 -- 2,~~530~~581 Recovery from doubtful accounts (188) -- -- -- (188) Gain on pension curtailment (5,420) -- -- -- (5,420) Other non-cash operating items 70 -- (63) -- 7 Changes in operating assets and liabilities: Accounts receivable 1,653 1,601 (765) -- 2,~~984~~489 28Inventories (7,~~905~~557) ~~Merger~~(143) (1,761) (5) (9,466) Prepaid expenses 3and other current assets (140) 21 (61) -- (180) Other assets (2,~~226~~726) ~~701~~1 (8) -- 3(2,~~927~~733) Accounts payable (5,765) (363) 649 -- (5,479) Accrued liabilities 1,577 (594) 81 -- 1,064 Deferred liabilities 14 -- -- -- 14 Pension liability (net) (898) -- -- -- (898) Intercompany receivables / payables (507) (479) 996 (10) -- ------- ------- ------- ------- ------- ~~Operating~~Net ~~income~~cash provided by (1used in) operating activities (5,~~764~~916) ~~733~~253 ~~386~~167 --(9) (~~645~~5,505) ~~Other~~------- ~~income~~------- ------- ------- ------- Cash flows provided by (~~expense~~used in) investing activities: ~~Interest~~Net ~~expense~~proceeds from sale of property 2,771 ~~net~~-- -- -- 2,771 Property, plant and equipment additions (41,~~802~~778) --(171) (4834) -- (41,~~850~~983) ~~Other~~------- ~~income~~------- ------- ------- ------- Net cash provided by (~~expense~~used in), ~~net~~investing 8activities 993 (2171) ~~164~~(34) ~~170~~ -- 788 ------- -------- ------- ------- ------- Cash flows provided by (used in) financing activities: Principal borrowings under revolving credit facility, net 8,000 -- -- -- 8,000 Principal payments under mortgage -- -- ~~Earnings~~(15) -- (~~loss~~15) ~~before~~Distribution ~~income~~to ~~taxes~~DLI Holding Corp. (62,~~558~~020) ~~731~~-- ~~502~~-- -- (52,~~325~~020) ~~Provision~~Payment ~~for~~of ~~income~~capital ~~taxes~~lease obligations (~~2,594~~32) ~~446~~-- 45-- -- (232) ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities 5,~~103~~948 -- (15) -- 5,933 ------- ------- ------- ------- ------- Effect of exchange rate changes on cash -- -- 8 9 17 ------- ------- ------- ------- ------- Net ~~earnings~~increase in cash and cash equivalents 1,025 82 126 -- 1,233 Cash and cash equivalents at beginning of period 343 (~~loss~~599) 298 -- 42 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period $ (31,~~964)~~368 $ ~~285~~(517) $ ~~457~~424 $ -- $ (31,~~222)~~275 ======== ======== ======== ======== ========

-23-

~~Guarantor~~CONSOLIDATING ~~Non~~STATEMENT OF CASH FLOWS Three Months Ended March 31, 2006 Restated GUARANTOR NON-~~Guarantor~~GUARANTOR ~~Issuer~~ISSUER ~~Subsidiaries~~SUBSIDIARIES ~~Subsidiaries~~SUBSIDIARIES ~~Eliminations~~ELIMINATIONS ~~Consolidated~~CONSOLIDATED ------ ------------ ------------ ------------ ------------ Cash flows from operating activities: Net ~~sales~~earnings (loss) $ 13(2,~~389~~970) $ 3(1,~~129~~035) $ 351 $ 1~~,688~~ $ 18(3,~~206~~653) ~~Cost~~Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 2,745 807 104 (5) 3,651 Amortization of ~~goods~~display ~~sold~~fixtures 72,~~890~~119 ~~952~~-- ~~876~~142 9-- 2,~~718~~261 ~~Selling~~Amortization of deferred financing fees and ~~administrative~~original ~~expenses~~issue 7discount 658 -- -- -- 658 Non-cash stock compensation 223 -- -- -- 223 Deferred income taxes (2,~~140~~927) 3-- -- -- (2,~~270~~927) Provision for excess and slow moving inventory 566 534 131 -- 1,~~065~~231 11Provision for doubtful accounts 45 -- -- -- 45 Gain on sale of property (48) -- -- -- (48) Other non-cash operating items -- -- 39 -- 39 Changes in operating assets and liabilities: Accounts receivable (6,~~475~~626) ~~Severance~~435 ~~expenses~~(345) -- (6,536) Inventories 246 (421) (1,047) -- ~~Merger~~(1,222) Prepaid expenses 15and other current assets 1,~~483~~057 136 (337) -- 856 Other assets (3,~~491~~274) -- 18(461) -- (3,~~974~~735) Accounts payable (4,034) 181 616 -- (3,237) Accrued liabilities 3 (1,168) 253 (1) (913) Pension liability (net) 212 -- -- -- 212 Intercompany receivables / payables (1,308) 1,361 (74) 21 -- -------- -------- -------- -------- ~~Operating~~-------- ~~loss~~Net cash provided by (~~17,124~~used in) operating activities (413,~~584~~313) 830 (~~253~~628) --16 (2113,~~961~~095) ~~Other~~-------- ~~income~~-------- -------- -------- -------- Cash flows provided by (~~expense~~used in) investing activities: ~~Interest~~Net ~~expense~~proceeds from sale of property 50 -- -- -- 50 Property, ~~net~~plant and equipment additions (~~239~~1,810) (43) (18) -- (251,871) -------- -------- -------- -------- -------- Net cash used in investing activities (~~264~~1,760) ~~Other~~(43) ~~income~~(18) -- (~~expense~~1,821) -------- -------- -------- -------- -------- Cash flows provided by (used in) financing activities: Principal borrowings under revolving credit facility, net 13,900 -- -- -- 13,900 Principal payments under mortgage -- -- (1114) -- (~~221~~14) Payment of deferred financing fees (~~232~~326) -- -- -- (326) Contributed capital 40 -- -- -- 40 Payment of capital lease obligations (31) -- -- -- (31) -------- -------- -------- ~~Loss~~-------- ~~before~~-------- ~~income~~Net ~~taxes~~cash provided by (~~17,374~~used in) (4financing activities 13,~~584~~583 -- (14) -- 13,569 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash -- -- 33 (~~499~~16) 17 -------- -------- -------- -------- -------- Net increase (~~22,457~~decrease) ~~Benefit~~in ~~from~~cash ~~income~~and ~~taxes~~cash equivalents (241,~~273~~490) 787 (627) -- (~~161~~1,330) ~~(24~~Cash and cash equivalents at beginning of period 1,862 (434) 1,174 -- 2,602 -------- -------- -------- -------- -------- ~~Net~~Cash ~~earnings~~and ~~(loss)~~cash equivalents at end of period $ ~~6,899~~372 $ ~~(4,584)~~353 $ ~~(338)~~547 $ -- $ 1,~~977~~272 ======== ======== ======== ======== ========

-24- Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is a fully integrated manufacturing and marketing company operating in two major segments of the packaged consumer products business: cosmetics and OTC pharmaceuticals. Each of the Company's marketing divisions is responsible for branded lines fitting into one of these two general categories and develops its own plans and goals consistent with its operating environment and the Company's corporate objectives. The Company owns a portfolio of highly recognized branded products, which are easy to use, competitively priced and trusted by consumers and retailers. As reported by ACNielsen or Information Resources, Inc. ("IRI"), many of the Company's brands have leading market positions in their product categories. In the Company's cosmetics segment, the SALLY HANSEN(R) brand is the number one brand in the mass market nail care category with market leadership positions in nail enamel, nail treatment and bleaches and depilatories. The LACROSS(R) brand is a leader in nail and beauty implements, providing a line of high quality beauty implements including nail clippers, files, scissors, tweezers and eyelash curlers. N.Y.C. NEW YORK COLOR(R) is a highly recognizable brand of value cosmetics offering a complete collection of high quality products at opening price points. In the Company's OTC pharmaceutical segment, ORAJEL(R) is the number one oral analgesic in the United States (based on market share), and the number one pharmacist-recommended brand in the teething segment. The ORAJEL(R) family of products has been developed with formulations specifically targeted at distinct oral pain and infant care indications. The Company's DERMAREST(R) brand is the most complete line of non-prescription products for relief of psoriasis and eczema and is the market share leader in the psoriasis/eczema treatment category. The Company believes that it has strong customer relationships with a diversified group of prominent retailers and wholesalers across multiple distribution channels including mass merchandisers, drug chains, drug wholesalers and food retailers and wholesalers. The Company has a strong track record of developing innovative new products and successful brand extensions. The Company's in-house research and development departments focus on product development, clinical and regulatory affairs and quality control. The information below for the three months ended March 31, 2006 has been adjusted to reflect the restatement of the Company's financial results which is more fully described in Note 3, "Restatements" in the Notes to the Consolidated Financial Statements. As previously disclosed, the Company was unable to file its Quarterly Report on Form 10-Q for the quarter ended March 31, 2007 by the required filing date of May 15, 2007 as the Company determined that it was necessary to re-evaluate its customer liabilities pertaining to reserves required for future sales returns and markdowns. The Company has completed this re-evaluation and concluded that immaterial adjustments are required to previously reported amounts and that it has made such corrections through an adjustment (increase) to its customer liability reserves of $209 in the quarter ended March 31, 2007. RECENT DEVELOPMENTS RETIREMENT PLAN AMENDMENTS Effective April 1, 2007 (approved and adopted January 15, 2007 by the Board of Directors of the Company), the Company amended the Employees' Pension Plan. As a result of this amendment, the plan is closed to new employees and the accrual of future benefits to current employees has been discontinued. All retirement benefits that employees earned as of April 1, 2007 have been fully preserved. Employees' ongoing service with the Company will continue to be credited for vesting purposes. The amendment of the Employees' Pension Plan resulted in a curtailment of the plan. As a result of this curtailment, the Company recorded a reduction in the benefit obligation of $10.3 million, a reduction in the unrecognized net actuarial loss of $4.9 million and a benefit of $5.4 million during the first quarter of 2007. -25- Effective April 2, 2007, the 401(k) plan has been redesigned as a result of the Company's amendment of its Employees' Pension Plan. The following represent the material changes to the 401(k) plan: (i) automatic enrollment for all eligible employees; (ii) Company matching contributions of employee's contributions up to 3% of eligible compensation, and 50% of the next 2% contributed; and (iii) a Company additional automatic contribution of 3% of eligible compensation for employees who on April 1, 2007 were at least 50 years of age and had 10 or more years of vesting service. CLOSING OF THE MANUFACTURING ACTIVITIES AT THE CANAJOHARIE FACILITY On February 12, 2007, the Company announced plans to transfer the manufacturing activities currently performed at its plant in Canajoharie, New York (the "Canajoharie Plant") to independent contractors in North Carolina. The transfer resulted in the termination of approximately 71 employees, which was conducted in phases which began in mid April 2007, and was completed as of June 30, 2007. The Company is currently listing the Canajahorie Plant for sale. Pursuant to the Company's formal severance policy, a charge of $0.6 million for severance costs and related benefits was recorded during the first quarter of 2007 in accordance with SFAS No. 112. Additional severance benefits earned for future services by employees being terminated will be recognized as a charge in the consolidated financial statements as such severance benefits are earned. The Company estimates that approximately $0.1 million, all in the Cosmetic segment, will be incurred for additional severance costs during 2007. Cash payouts are expected to be completed by the end of 2007. As of March 31, 2007, no employees have been terminated and no severance benefits have been paid. OPERATIONAL INITIATIVES In addition to the Company's focus on realizing cost savings, the Company is committed to improving the efficiency of its operations. In mid-2005, the Company engaged Synergetics Installations Worldwide, Inc., or Synergetics, a leading management consulting firm specializing in providing supply chain management advice to manufacturing companies, to assist the Company in realizing previously identified cost savings as well as identifying and implementing additional cost saving opportunities. The Company has substantially completed the implementation of sales and operational process initiatives designed to improve sales forecasting, demand planning and production scheduling, the efficiency level of the manufacturing facilities, and the process of identifying, evaluating and selling promotional products. The Company anticipates incremental annualized cost savings in 2007 of approximately $6.0 million. The Company has incurred consulting fees and implementation costs associated with its 2005 and 2006 cost savings activities of approximately $1.2 million and $3.7 million, respectively. In the fourth quarter of 2006, the Company recorded an incremental $25.1 million charge to cost of goods sold to increase its reserves for excess and slow moving inventory. The $25.1 million change in estimate is a result of the execution of various initiatives designed to enhance the value of the Company's brands; specifically SALLY HANSEN(R) and ORAJEL(R). These initiatives are consistent with the Company's revised strategic plan which was approved by senior management and certain members of the Board of Directors in December 2006. The Company undertook a process to evaluate its product mix, required inventory levels to support the service level demands of its customers and the appropriateness of its inventory reserves, in relation to the revised strategic plan. This evaluation addressed the usage of existing inventory either within current products, or through the production and sale of promotional inventory or special products. A significant portion of the additional reserve resulted from the Company (i) exiting non-core product lines, (ii) refining its sales forecasting and demand planning activities, (iii) increasing the volume of finished goods produced at third parties which hindered the usefulness of existing inventory components, (iv) incurring increasing losses on the disposition of certain slow moving products and (v) experiencing changes in market conditions for close-out inventory product offerings. -26- Inventory reserves 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, retailer consolidations, fashion - oriented color cosmetic trends or competitive conditions differ from expectations. RESULTS OF OPERATIONS THREE MONTHS ENDED MARCH 31, 2007 COMPARED TO THREE MONTHS ENDED MARCH 31, 2006 (Restated) The following table sets forth the Company's results of operations for the three months ended March 31, 2007 and 2006. See Note 3 to the Notes to the Consolidated Financial Statements for additional information related to the restatements. Three Months Ended March 31, 2007 2006 ---- ---- (Restated) ($000) Net Sales Cosmetic segment $ 80,334 $ 73,266 Pharmaceutical segment 23,681 19,904 --------- --------- Total net sales 104,015 93,170 Cost of goods sold 50,921 48,528 --------- --------- Gross profit 53,094 44,642 Selling and administrative expenses 45,774 41,419 Gain on pension curtailment (5,420) -- Severance expenses 759 146 --------- --------- Operating income 11,981 3,077 Other income (expense): Interest expense, net (9,439) (8,843) Other income (expense), net 4 9 --------- --------- Earnings (loss) before income taxes 2,546 (5,757) Provision for (benefit from) income taxes 1,067 (2,104) --------- --------- Net earnings (loss) $ 1,479 $ (3,653) ========= ========= The Company's net sales for the three months ended March 31, 2007 were $104.0 million, an increase of $10.8 million, or 11.6% compared to net sales of $93.2 million for the three months ended March 31, 2006. The Cosmetic segment of the business generated net sales for the three months ended March 31, 2007 of $80.3 million, an increase of $7.0 million, or 9.6% compared to net sales of $73.3 million for the three months ended March 31, 2006. Net sales increased primarily due to higher shipments of the SALLY HANSEN(R) nail color, nail treatment and lip product lines, as well as higher international net sales (a 24.8% increase over 2006), partially offset by lower shipments in non-core product lines. As reported by IRI, the SALLY HANSEN(R) brand remains the number one brand in the mass market nail care category with a 24.3% share of market for the quarter. In nail enamel, the SALLY HANSEN(R) brand increased its number one market share position to a 41.4% share of market. SALLY HANSEN(R) has the number one market share position in nail treatment with a 48.1% share of market for the quarter, down from 51.1% in the prior year comparable quarter. This decrease is primarily attributable to the significant growth in the anti-fungal category in which the Company does not aggressively participate. The Company has increased its number one market share position in bleaches and depilatories to a 37.6% share of market for the quarter. LACROSS(R) has the number three market share position in nail and beauty implements with a 14.8% share of the market for the quarter, a decrease from the prior year comparable quarter due to the loss of a major mass market customer due to aggressive competitor pricing. -27- The over-the-counter Pharmaceutical segment of the business generated net sales for the three months ended March 31, 2007 of $23.7 million, an increase of $3.8 million, or 19.0% compared to net sales of $19.9 million for the three months ended March 31, 2006. Net sales increased primarily due to higher shipments in the ORAJEL(R) line of oral analgesics. ORAJEL(R), the core brand of the Pharmaceutical segment maintained its leadership position in the oral analgesics category with a 32.0% share of market for the first quarter, as reported by IRI. Cost of goods sold for the three months ended March 31, 2007 was $50.9 million, or 49.0% of net sales compared to $48.5 million or 52.1% of net sales for the three months ended March 31, 2006. This decrease as a percentage of net sales reflects cost savings achieved as a result of continued operational improvements, higher net sales in the Pharmaceutical segment and a continued trend in the Company's business towards higher margin products, primarily in the Cosmetic segment. Cost of goods sold for the three months ended March 31, 2006 included approximately $1.0 million, or 1.1% of net sales related to unabsorbed overhead costs in connection with the closure of the Little Falls manufacturing facility which were recorded according to the provisions of SFAS No. 151. Selling and administrative expenses for the three months ended March 31, 2007 were $45.8 million, or 44.0% of net sales compared to $41.4 million or 44.5% of net sales for the three months ended March 31, 2006. The Company recorded a gain on pension curtailment of $5.4 million during the three months ended March 31, 2007 in connection with the amendment of the Employees' Pension Plan. Severance expenses for the three months ended March 31, 2007 primarily represent charges recorded in connection with the ceasing of manufacturing activities at the Canajoharie Plant. Net interest expense for the three months ended March 31, 2007 and 2006 of $9.4 million and $8.8 million, respectively, was primarily attributable to interest incurred on the Floating Rate Notes (as defined herein), the Subordinated Notes (as defined herein) and the ABL Credit Facility. The increase in net interest expense was primarily attributable to an increase in interest rates. Income tax expense for the three months ended March 31, 2007 of $1.1 million was based on the Company's expected effective tax rate of 41.9% for the year ending December 31, 2007. The increase in the effective income tax rate is primarily due to a greater impact of projected permanent items on foreign book income as compared to the previous year. The income tax benefit for the three months ended March 31, 2006 of $2.1 million was based on the Company's effective tax rate of 36.5% for year ended December 31, 2006. -28- LIQUIDITY AND CAPITAL RESOURCES The Company's liquidity needs arise primarily from debt service on its substantial indebtedness and from funding of capital expenditures, ongoing operating costs and working capital. In connection with the Merger in January 2005, substantially all of the Company's then outstanding indebtedness was redeemed, repurchased or otherwise repaid and replaced. The Company issued $175 million of senior subordinated notes due 2012 (the "Subordinated Notes"), and closed on the prior senior credit facilities which provided for aggregate maximum borrowings of $250.0 million, consisting of a prior term loan facility of $200.0 million and a prior revolving credit facility of $50.0 million. On October 28, 2005, the Company refinanced and terminated the prior senior credit facilities through the issuance of $185.0 million of senior secured floating rate notes due November 1, 2011 (the "Floating Rate Notes"), and a $75.0 million credit agreement. This agreement was used as interim financing until December 29, 2005, when it was replaced with an $85.0 million asset-based revolving credit facility, as subsequently amended (the "ABL Credit Facility"). Principal and interest payments under the Floating Rate Notes, the ABL Credit Facility and the Subordinated Notes will represent significant liquidity requirements for the Company. The Company expects that cash flow from operating activities and expected available borrowings under the ABL Credit Facility will provide sufficient working capital to operate the Company's business, to fund expected capital expenditures and to meet foreseeable liquidity requirements, including debt service on the Company's outstanding debt. The Company's ability to borrow under the ABL Credit Facility is subject to a borrowing base consisting of a percentage of eligible accounts receivable and eligible inventory. No assurance can be given, however, that the Company's business will, in fact, generate sufficient cash flows or that future borrowings will, in fact, be available in an amount sufficient to enable the Company to service its debt or to fund its other liquidity needs. THE SUBORDINATED NOTES AND FLOATING RATE NOTES The Subordinated Notes bear interest at 8% and are guaranteed by certain of the existing and future domestic subsidiaries of the Company. The Subordinated Notes and guarantees are unsecured senior subordinated obligations and rank equally with all future subordinated indebtedness and are subordinated to the current and future senior indebtedness and other liabilities of the Company and its subsidiaries. Interest on the Subordinated Notes is payable semi-annually on February 1 and August 1. The Subordinated Notes contain covenants that, among other things, limit the issuance of additional indebtedness, the incurrence of liens, the payment of dividends or other distributions, the distributions from certain subsidiaries, the issuance of preferred stock, the sale of assets and subsidiary stock, transactions with affiliates and consolidations, mergers and transfers of assets. All of these limitations and prohibitions, however, are subject to a number of important qualifications, set forth in the Subordinated Notes Indenture. -29- The Floating Rate Notes bear interest at a rate per annum equal to three-month LIBOR plus 5.0%. The Floating Rate Notes are guaranteed by certain of the existing and future domestic subsidiaries of the Company. The Floating Rate Notes and guarantees are secured by a first priority security interest in substantially all of the Company's and guarantors' assets, other than inventory, receivables, equity interest in the Company's subsidiaries and other specified excluded assets and by a second priority security interest in substantially all the Company's and guarantors' inventory, receivables and other specified liquid assets. The Floating Rate Notes and guarantees rank equally with all existing and future senior indebtedness and rank senior to all existing and future subordinated indebtedness, including the Subordinated Notes and related guarantees. Interest on the Floating Rate Notes is payable quarterly on February 1, May 1, August 1 and November 1. The Floating Rate Notes contain covenants that, among other things, limit the issuance of additional indebtedness, the incurrence of liens, the payment of dividends or other distributions, distributions from certain subsidiaries, the issuance of preferred stock, the sale of assets and subsidiary stock, transactions with affiliates and consolidations, mergers and transfers of assets. All of these limitations and prohibitions, however, are subject to a number of important qualifications, set forth in the Floating Rate Notes Indenture. On June 20, 2007, the Company received notices of default from the Trustees. Under Section 4.03(a) of the Indentures, the Company was required to file its Form 10-Q within the time period specified by the SEC's rules and regulations. The Trustee for each Indenture provided the notice of default to notify the Company that it was in violation of Section 4.03(a) of the respective Indenture as a result of the delay in the filing of the Form 10-Q, as described above under "Overview" and in Note 3 to the Consolidated Financial Statements, and to demand that the Company remedy the default. Each Indenture provides that the Company has 30 days from receipt of a notice of default to cure such default before an event of default occurs under the Indenture. If an event of default occurs, the respective Trustee or the Holders of 25% in aggregate principal amount of the Subordinated Notes or the Floating Rate Notes, as the case may be, may declare the applicable Notes to be due and payable immediately. The Company has cured the default with respect to each Indenture as of July 6, 2007 by filing this report. THE ABL CREDIT FACILITY The ABL Credit Facility, which was subsequently amended on February 23, 2006 and November 29, 2006, matures on December 29, 2010 and provides for aggregate maximum borrowings of $85.0 million. The ABL Credit Facility is guaranteed by DLI Holding II Corp. and by certain of the Company's existing and future domestic subsidiaries. The ABL Credit Facility is an asset-based facility with a first priority security interest in substantially all accounts receivable and inventory and a second priority security interest in substantially all tangible and intangible assets. The ABL Credit Facility is also secured on a first priority basis by the capital stock of the Company's domestic subsidiaries. Also, the guarantee by DLI Holding II Corp., is secured by a pledge of all of its assets. The Company and the subsidiary guarantors, the credit facility collateral agent and the Trustee for the Floating Rate Notes and the note collateral agent entered into an Intercreditor Agreement. -30- Borrowings under the ABL Credit Facility are determined by a formula which provides eligibility of up to 85% of the net book value of domestic accounts receivable and a range of 35% to 65% of domestic inventory. Borrowings under the ABL Credit Facility bear interest at the Company's option at either: (i) an alternate base rate which is equal to the higher of 0.50% per year above the federal funds effective rate and the base rate announced by the ABL Credit Facility's administrative agent as its prime rate plus an applicable margin ranging from 0.25% to 0.75% (0.25% at March 31, 2007) based on the Company's borrowing base availability, or (ii) an Adjusted LIBOR rate plus an applicable margin ranging from 1.25% to 1.75% (1.25% at March 31, 2007) based on the Company's borrowing base availability. The terms of the ABL Credit Facility include a commitment fee of .375% based on unused commitments of the lenders, letter of credit fees on the aggregate face amount of outstanding letters of credit and underwriting and administrative fees. The ABL Credit Facility includes covenants, that among other things, limit or restrict the Company's and its subsidiaries abilities to dispose of assets, incur additional indebtedness, incur guarantee obligations, prepay other indebtedness, make dividends, create liens, make investments, make acquisitions, modify the terms of the documents governing the indebtedness, engage in mergers or make capital expenditures or engage in certain transactions with affiliates. The ABL Credit Facility also requires the Company to comply with a minimum coverage ratio of Consolidated EBITDA to fixed charges whenever excess borrowing availability is less than $10.0 million on any day. As of March 31, 2007, the Company had $18.0 million of senior debt and $1.0 million of letters of credit outstanding under the ABL Credit Facility, $66.0 million of unutilized commitments and $60.3 million of availability thereunder. As of July 2, 2007, the Company had $20.0 million of senior debt and $1.0 million of letters of credit outstanding under the ABL Credit Facility, $64.0 million of unutilized commitments and $60.6 million of availability thereunder. The ABL Credit Facility requires the Company to enter into interest rate protection agreements to provide interest rate protection for a minimum of 45% of the Company's consolidated funded indebtedness for two years. Effective February 1, 2006, the Company entered into a cap/floor collar agreement (the "Collar") with JPMorgan Chase Bank, N.A. to provide the required interest rate protection and to manage its exposure to changes in LIBOR. The Collar is for a notional amount of $100.0 million expiring on February 1, 2009 and has a cap rate of 5.5% and a floor rate of 4.29%. The Collar has been designated as a cash flow hedge of the variability of the cash flows due to changes in LIBOR and has been deemed to be highly effective. Accordingly, the Company records the fair value of the Collar as an asset or liability on its consolidated balance sheet, and any unrealized gain or loss is included in accumulated other comprehensive income. As of March 31, 2007, the Company recorded a liability of $132 in the accompanying consolidated balance sheet and recorded an after-tax net loss of $83 and an after-tax net gain of $169 in accumulated other comprehensive income during the three months ended March 31, 2007 and 2006, respectively. No hedge ineffectiveness was recorded during the three months ended March 31, 2007 and 2006. FINANCIAL COVENANTS Borrowings under the ABL Credit Facility are subject to certain conditions and limitations described above. The indentures governing the Subordinated Notes and the Floating Rate Notes contain significant financial and operating covenants, including prohibitions on the Company's ability to incur certain additional indebtedness or to pay dividends. The ABL Credit Facility contains borrowing conditions and customary events of default, including nonpayment of interest, violation of covenants, inaccuracy of representations and warranties, cross-defaults to other indebtedness, bankruptcy and other insolvency events. -31- On March 31, 2007, the Company entered into a Waiver and Consent to the ABL Credit Facility. Among other things, the Waiver and Consent (i) waived certain Defaults or Events of Default relating to any potential restatement or revision of the Company's consolidated financial statements delivered prior to the date of the Waiver and Consent, and (ii) extended the date on which audited financial statements with respect to the fiscal year ended December 31, 2006, and certain other documents under the ABL Credit Facility, were required to be delivered to April 30, 2007 from March 31, 2007. The Company delivered its audited financial statements for the fiscal year ended December 31, 2006 and all other required documents under the ABL Credit Facility to its lenders on April 30, 2007. On May 15, 2007, the Company entered into a Second Waiver and Consent to the ABL Credit Facility. Among other things, the Second Waiver and Consent (i) waived certain Defaults or Events of Default relating to any potential restatement or revision of the Company's consolidated financial statements delivered prior to the date of the Second Waiver and Consent, and (ii) extended the date on which unaudited financial statements for the three months ended March 31, 2007, and certain other documents under the ABL Credit Facility, were required to be delivered to June 15, 2007 from May 15, 2007. On June 15, 2007, the Company entered into a Third Waiver and Consent to the ABL Credit Facility. Among other things, the Third Waiver and Consent (i) waived certain Defaults or Events of Default relating to any potential restatement or revision of the Company's consolidated financial statements delivered prior to the date of the Third Waiver and Consent, and (ii) extended the date on which unaudited financial statements for the three months ended March 31, 2007, and certain other documents under the ABL Credit Facility, were required to be delivered to July 10, 2007 from June 15, 2007. The ABL Credit Facility has a minimum fixed charge coverage ratio financial covenant that is effective if the minimum excess availability under the ABL Credit Facility is less than specified levels. Under the terms of the ABL Credit Facility, the minimum fixed charge coverage ratio test would not have applied as of March 31, 2007 as borrowing availability under the ABL Credit Facility would have exceeded the specified threshold. The minimum fixed charge coverage ratio test requires the Company to comply with a minimum coverage ratio of consolidated EBITDA to fixed charges of at least 1:1 whenever excess availability is less than $10.0 million (which amount will be increased in proportion to any increase in commitments under the ABL Credit Facility). Credit Agreement EBITDA as presented herein is a financial measure that is used in the credit agreement for the Company's ABL Credit Facility. Credit Agreement EBITDA is not a defined term under U.S. GAAP and should not be considered as an alternative to operating income or net income, as a measure of operating results or cash flows or as a measure of liquidity. Credit Agreement EBITDA differs from the term "EBITDA" as it is commonly used. Credit Agreement EBITDA, as that term is defined in the ABL Credit Facility and used as part of the calculation of the term "Consolidated Coverage Ratio" which is used for a number of purposes, including the Company's ability to incur additional indebtedness, consists of consolidated net income, adjusted to exclude income tax expense, interest expense, and depreciation and amortization, as well as certain other items and expenses, including amortization of intangibles, extraordinary, unusual or non-recurring gains or losses, consultation fees and expense reimbursements associated with implementing process improvements and cost reductions developed by the Company in conjunction with the Synergetics Installations Worldwide, Inc. consulting group, certain non-cash charges or expenses deducted in determining net income, certain cash restructuring charges, loss or gain associated with the sale or write down of assets not in the ordinary course of business, the amount of any net minority expense, and certain losses relating to the disposition of excess or surplus inventory. -32- The calculation of Credit Agreement EBITDA for the periods indicated is set forth below. (in 000's)

~~Guarantor~~Qtr ~~Non-Guarantor~~2 ~~Issuer~~Qtr ~~Subsidiaries~~3 ~~Subsidiaries~~Qtr ~~Eliminations~~4 ~~Consolidated~~Qtr 1 2006 2006 2006 2007 TOTAL ------ -- ---------- --------~~----~~ --------~~----~~ --------~~----~~ Restated Restated Net ~~sales~~earnings (loss) $ 58(1,~~406~~790) $ 16225 $(13,~~648~~914) $ 81,~~011~~479 $(14,000) 83Income tax expense (benefit) (1,~~065~~030) ~~Cost~~129 of(8,013) ~~goods~~1,067 ~~sold~~(7,847) 32Interest expense,~~849~~ 4net 9,~~314~~431 49,~~052~~385 419,~~215~~473 ~~Selling~~9,439 37,728 Depreciation and ~~administrative~~amortization ~~expenses~~6,185 256,~~026~~689 117,~~049~~307 36,~~605~~927 3927,~~680~~108 ~~Severance~~Losses ~~expenses~~related ~~(7)~~to ~~(3)~~inventory --impairment (101) --~~------~~ --~~------~~ ~~--------~~5,000 --~~------~~ ~~-------- Operating income 538 1~~5,~~288~~000 ~~354~~Little --Falls ~~2,180~~closure ~~Other~~costs ~~income~~ (~~expense~~2): ~~Interest expense~~1,804 ~~net (~~1,~~000)~~830 -- ~~(23)~~-- (13,~~023)~~634 ~~Other~~Synergetics ~~income~~fees ~~(expense),~~and ~~net~~expenses ~~(54)~~941 ~~(7)~~708 11929 ~~(50)~~ --~~------~~ ~~--------~~2,578 Non-~~-------~~cash ~~--------~~stock ~~--------~~compensation ~~Earnings~~charges ~~(loss)~~222 ~~before~~161 ~~income~~164 ~~taxes~~168 715 Other (~~516~~3) ~~1,281~~305 ~~342~~(250) --983 1(4,~~107~~279) ~~Income taxes~~ (~~130~~3,241) ~~415 142 427~~ -------- -------- -------- -------- -------- ~~Net~~Credit ~~earnings~~Agreement EBITDA (~~loss~~4) $ ~~(386)~~16,068 $ ~~866~~18,877 $ ~~200~~1,929 $ --14,801 $ ~~680~~51,675 ======== ======== ======== ======== ======== (1) The Company recorded an incremental $25,054 provision for excess and slow moving inventory in the fourth quarter of 2006. The credit agreement limits the add back of losses related to disposition of excess, surplus or obsolete inventory to $5,000 per fiscal year and $15,000 in the aggregate, commencing with the fourth quarter of 2005. (2) Represents unabsorbed overhead costs of $3,349 charged to cost of goods sold, in accordance with SFAS No. 151, and $285 of implementation costs in connection with the closure of the Little Falls manufacturing facility. (3) Other represents extraordinary, unusual or non-recurring items, and other permitted add backs or adjustments under the credit agreement, including a benefit of $5,420 recorded during the first quarter of 2007 relating to the curtailment of the Employees' Pension Plan. (4) Credit Agreement EBITDA for the fourth quarter of 2006 and the latest twelve months ended March 31, 2007 would have been $21,983 and $71,729, respectively, if adjusted for the additional $20,054 in the provision for excess and slow moving inventory that can not be added back pursuant to the credit agreement. (5) Credit Agreement EBITDA (restated) for the first quarter of 2006 was $11,578.

OPERATING ACTIVITIES Net cash used in operating activities for the three months ended March 31, 2007 of $5.5 million was principally the result of $9.0 million in cash generated (net earnings of $1.5 million plus depreciation and amortization of $4.2 million, amortization of display fixtures of $2.7 million, the provision for excess and slow moving inventory of $2.6 million and deferred income taxes of $3.4 million, less the pension curtailment gain of $5.4 million) and a decrease in accounts receivable of $2.5 million, offset by an increase in inventories of $9.5 million, an increase in other assets of $2.7 million and a decrease in accounts payable and accrued liabilities of $4.4 million. Accounts receivable decreased due to the timing of shipments and receipt of payment from shipments which occurred during the fourth quarter of 2006. Inventories increased due to the purchase of materials to support projected 2007 sales levels. Other assets increased primarily due to the purchase and shipment of display fixtures to customers. Accounts payable and accrued liabilities decreased due to the timing of payments and purchases of material. -33- Net cash used in operating activities for the three months ended March 31, 2006 of $13.1 million was principally the result of $0.2 million in cash generated (pre-tax loss of $5.8 million plus depreciation and amortization of $3.7 million and amortization of display fixtures of $2.3 million), offset by increases in accounts receivable of $6.5 million, other assets of $3.7 million and a decrease in accounts payable of $3.2 million. Other assets increased due to the purchase and shipment of display fixtures to customers. Accounts payable decreased due to the timing of payments related to material purchases. INVESTING ACTIVITIES Net cash provided by investing activities of $0.8 million for the three months ended March 31, 2007 was primarily related to net proceeds of $2.8 million from the sale of the property in Little Falls, New York, offset by $2.0 million of capital spending for tooling, plates and dies, and manufacturing machinery and equipment. The Company currently expects that total expenditures for capital and display fixtures for 2007 will be approximately $22.0 million. Net cash used in investing activities of $1.8 million for the three months ended March 31, 2006 was primarily related to capital spending for tooling, plates and dies, and manufacturing machinery and equipment. FINANCING ACTIVITIES Net cash provided by financing activities for the three months ended March 31, 2007 of $5.9 million was primarily due to borrowings under the Company's ABL Credit Facility of $8.0 million to support seasonal working capital requirements and a $2.0 million distribution to DLI Holding Corp. used for the repurchase of stock. Cash paid for interest during the three months ended March 31, 2007 was $12.1 million. The Company anticipates that its debt service requirements in 2007 will be approximately $34.6 million. Net cash provided by financing activities for the three months ended March 31, 2006 of $13.6 million was primarily due to borrowings under the Company's ABL Credit Facility. The Company does not use any off-balance sheet financing arrangements. The Company anticipates that it may, from time to time, purchase its debt securities through the open market. -34- DISCUSSION OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company makes estimates and assumptions in the preparation of its financial statements in conformity with U.S. generally accepted accounting principles. Actual results could differ significantly from those estimates under different assumptions and conditions. The Company's most critical accounting policies relate to business acquisitions, revenue recognition, promotional allowance and co-operative advertising, accounts receivable, inventories, property, plant and equipment and other long-lived assets, pension benefits and income taxes. Further information regarding these policies appears within "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the Company's 2006 Annual Report on Form 10-K. Since December 31, 2006, there have been no significant changes to the Company's critical accounting policies or to the related assumptions and estimates involved in applying these policies, except as described in the following paragraph. In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an Interpretation of FASB No. 109" ("FIN No. 48"). FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. The Company adopted the provisions of FIN No. 48 effective January 1, 2007. As a result of the adoption of FIN No. 48, the Company recorded a $1.3 million increase in the net liability for unrecognized tax benefits, which as required, was accounted for as an increase to the January 1, 2007 accumulated deficit. NEW ACCOUNTING PRONOUNCEMENTS In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115" ("SFAS No. 159"). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The provisions of SFAS No. 159 are effective as of the beginning of the first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 159 will have on its consolidated financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements, the FASB having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this statement does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the impact, if any, that the adoption of SFAS No. 157 will have on its consolidated financial statements. In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS No. 158"). SFAS No. 158 requires an employer to recognize the over-funded or under-funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position, measure a plan's assets and its obligations as of the end of the employer's fiscal year-end and recognize changes in the funded status in the year in which the changes occur through comprehensive income. SFAS No. 158 is effective for financial statements of employers without publicly traded equity securities as of the year of the fiscal year ending after June 15, 2007. The Company is currently evaluating the impact, if any, that SFAS No. 158 will have on its consolidated financial statements. -35- FORWARD-LOOKING STATEMENTS Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Quarterly Report on Form 10-Q include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, (the "Exchange Act"). All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, statements regarding the Company's liquidity, future financial results, economic conditions, trends, certain risks and uncertainties, expected efficiency improvements, and expected future cost savings are forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "estimate," "anticipate," "seek," "should," "look forward to," "indications," "plan," "momentum," "believe" or "continue" or the negative thereof or variations thereon or similar terminology. Many factors could affect our actual financial results and could cause actual results to differ materially from those expressed in the forward-looking statements. Important factors that could cause actual results to differ materially from the Company's expectations, or "cautionary statements," include, without limitation: o our substantial amount of debt; o delays in introducing new products or failure of consumers to accept new products; o actions by competitors which may result in mergers, technology improvement or new product introductions; o the Company's ability to realize cost savings and operational improvements; o the Company's estimates of required inventory reserves if future economic conditions, the timing of new product introductions, customer inventory levels, retailer consolidations, fashion-oriented color cosmetic trends or competitive conditions differ from expectations; o the Company's dependence on certain national chain drug stores, food stores and mass merchandiser relationships due to the concentration of sales generated by such chains; o changes in fashion-oriented color cosmetic trends; o the effect on sales of lower retailer inventory targets; o the effect on sales of political and/or economic conditions; o the Company's estimates of costs and benefits, cash flow from operations and capital expenditures; o interest rates affecting the Company; o regulatory requirements and government regulatory action; o failure to maintain satisfactory compliance with good manufacturing practice requirements; o changes in product mix to products which are less profitable; o shipment delays; o depletion of inventory and increased production costs resulting from disruptions of operations at any of its manufacturing or distribution facilities; o foreign currency fluctuations affecting the Company's results of operations and the value of its foreign assets and liabilities; -36- o the relative prices at which the Company sells its products and its competitors sell their products in the same market; o the Company's operating and manufacturing costs outside of the United States; o changes in the laws, regulations and policies, including changes in accounting standards, that affect, or will affect, the Company in the United States and/or abroad; and/or o trends in the general economy. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's analysis, judgment, belief or expectation only as of the date hereof. The Company undertakes no obligation to update or publicly revise these forward-looking statements to reflect events or circumstances that arise after the date hereof. In addition to the disclosure contained herein, readers should carefully review any disclosure of risks and uncertainties contained in other documents the Company files or has filed from time to time with the Securities and Exchange Commission pursuant to the Exchange Act. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The market risk inherent in 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 March 31, 2007 under the Floating Rate Notes and the ABL Credit Facility expose earnings to changes in short-term interest rates. Interest rates on the underlying obligations are either variable or fixed for such a short period of time as to effectively become variable. Effective February 1, 2006, the Company entered into a Collar with JPMorgan Chase Bank, N.A. for a notional amount of $100.0 million to hedge its exposure to changes in interest rates on a portion of the Floating Rate Notes. FOREIGN EXCHANGE RISK The Company is subject to risk from changes in the foreign exchange rate for the Company's foreign subsidiaries which use foreign currency as their functional currency and is translated into United States dollars. Such changes result in cumulative translation adjustments which are included in shareholders' equity and in the determination of other comprehensive income (loss). Intercompany transactions between the Company and its foreign subsidiaries are recorded by the foreign subsidiaries in their functional currency. -37- Item 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms, and that such information is accumulated and communicated to its management team, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. As of March 31, 2007, the Company's management, under the supervision and with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 15d-15(e)). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of that date, the Company's disclosure controls and procedures were not effective at a reasonable assurance level due to the material weaknesses in the Company's internal control over financial reporting described below. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in there being a more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. In connection with the preparation of its annual financial statements for the year ended December 31, 2006 and the related audit by its independent registered public accounting firm, KPMG LLP, the Company identified the following material weaknesses in its internal control over financial reporting as of December 31, 2006 which continued as of March 31, 2007. (1) The Company did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience and training in the application of generally accepted accounting principles commensurate with the Company's financial accounting and reporting requirements. This deficiency resulted in a material error in the accounting for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes". In addition, the Company did not effectively perform and document procedures to annually test goodwill and indefinite long lived assets for impairment in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". (2) The Company did not maintain effective policies and procedures relating to the computation of the sales return reserve. Specifically, the Company's policies and procedures did not provide for sufficient review and validation of the underlying assumptions and methodologies utilized in determining the adequacy of the reserve. (3) The Company had inadequate review controls over the accounting for and reporting of non-routine transactions and complex accounting matters. This deficiency resulted in the recording of an audit adjustment to the 2006 consolidated financial statements in connection with the computation of the fourth quarter incremental inventory reserve. These deficiencies caused and have the potential to cause a material misstatement and/or inadequate disclosures in the Company's consolidated financial statements. The material weaknesses identified in (1) and (2) above resulted in a restatement of the Company's prior consolidated financial statements as previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2006 and caused a delay in the filing of the Company's Form 10-Q. The Company is currently in the process of developing and implementing remediation plans to address its material weaknesses. Specific remedial actions that have or are being taken for each of the material weaknesses described above are as follows: -38- (1) Technical accounting knowledge, experience and training in the application of generally accepted accounting principles, including: o Engaged outside tax experts, under the supervision of the Chief Financial Officer and Treasurer, to assist with the preparation of the tax provision in accordance with SFAS No. 109 and to supplement the Company's overall level of tax expertise. o Implementing new policies and procedures to ensure that the tax provision is properly prepared and reviewed on a timely basis. o Assessing the technical accounting capabilities of its personnel to ensure the right complement of knowledge, skills and training. (2) Computation of the sales return reserve, including: o Created an enhanced database that more closely measures sales returns to the periods of original sale. o Implemented new policies and procedures requiring a detailed and comprehensive review of the underlying information supporting the amounts and estimates used to compute the reserve. o Enhanced communication and collaboration between the accounting department and the sales department. o Hired a financial analyst within the sales department to focus on customer liabilities relating to the cosmetic business segment. o Assigning monitoring and control activities to the Treasurer and upgraded the accounting function through the hiring of additional accountants with relevant experience. (3) Review controls over the accounting for and reporting of non-routine transactions and complex accounting matters, including: o Hired additional technical accounting personnel to address complex accounting and financial reporting requirements. o Assessing the technical accounting capabilities of its personnel to ensure the right complement of knowledge, skills and training. o Implementing a process that ensures the timely review and approval of complex accounting transactions by qualified accounting personnel. o Requiring analyses of all significant non-routine transactions be reviewed by senior management. o Developing improved monitoring controls in the accounting department. Other than the foregoing measures, which have not been not fully implemented to remediate the material weaknesses described above, there has been no change in the Company's internal control over financial reporting during the quarter ended March 31, 2007, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. The certifications of the Company's Chief Executive Officer and Chief Financial Officer included as Exhibits 31.1 and 31.2 to this Quarterly Report on Form 10-Q include, in paragraph 4 of such certifications, information concerning the Company's disclosure controls and procedures and internal control over financial reporting. Such certifications should be read in conjunction with the information contained in this Item 4 Controls and Procedures, for a more complete understanding of the matters covered by such certifications. The Company is continuing to perform the systems and process evaluation testing of its internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, in order to allow management to report on the internal control over financial reporting which will be required for the fiscal year ending December 31, 2007. -39- PART II - OTHER INFORMATION Item 1A. RISKS RELATED TO THE COMPANY There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2006. Item 6. EXHIBITS Exhibits Exhibit 10.1 Letter Agreement Regarding Employment with Shawn Smith, dated as of March 13, 2007. Filed as Exhibit 10.45 to Del Laboratories, Inc.'s Annual Report on Form 10-K filed April 30, 2007 (Commission File No. 001-05439) and incorporated herein by reference. Exhibit 10.2 Equity Settlement Agreement, dated as of February 15, 2007, among DLI Holding Corp., DLI Holding LLC, and William McMenemy. Filed as Exhibit 10.01 to Del Laboratories, Inc.'s Current Report on Form 8-K filed February 15, 2007 (Commission File No. 001-05439) and incorporated herein by reference. Exhibit 10.3 Amendment No. 3 to Employees' Pension Plan. Exhibit 10.4 Amendment No. 4 to 401(k) Plan. Exhibit 31.1 Certification of Chief Executive Officer. Exhibit 31.2 Certification of Chief Financial Officer. Exhibit 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. Exhibit 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350. -40- SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DEL LABORATORIES, INC. (Registrant) DATE: JULY 6, 2007 /S/ CHARLES J. HINKATY ----------------------- ---------------------- Charles J. Hinkaty President and Chief Executive Officer DATE: JULY 6, 2007 /S/ JOSEPH SINICROPI -------------------- -------------------- Joseph Sinicropi Executive Vice President and Chief Financial Officer -41-

Guarantor Non-Guarantor Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------- ----------- ------------ Cash flows from operating activities: Net earnings (loss) $ (3,964) $ 285 $ 455 $ 2 $ (3,222) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 1,609 473 68 2 2,152 Amortization of display fixtures 1,396 -- 93 1,489 Amortization of deferred financing fees & original issue discount 425 -- -- 425 Deferred income taxes (837) -- -- (837) Other non-cash operating items (381) -- (171) (552) Changes in operating assets and liabilities: Accounts receivable (2,785) (2,304) (1,581) (6,670) Inventories (2,292) 2,335 (350) (307) Prepaid expenses and other current assets (693) 213 21 (459) Other assets (2,995) 6 (303) (3,292) Accounts payable (3,086) (754) 142 (3,698) Accrued liabilities (14,729) (1,426) 185 (15,970) Deferred liability -- -- -- -- Pension liability (net) 338 -- -- 338 Income taxes receivable / payable (2,437) 350 (421) (2) (2,510) Intercompany receivables / payables (689) (249) 916 22 -- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (31,120) (1,071) (946) 24 (33,113) -------- -------- -------- -------- -------- Cash flows provided by (used in) investing activities: Property, plant and equipment additions (713) (67) (3) -- (783) Purchase of Del Laboratories, Inc (377,233) -- -- -- (377,233) -------- -------- -------- -------- -------- Net cash used in investing activities (377,946) (67) (3) -- (378,016) -------- -------- -------- -------- -------- Cash flows provided by (used in) financing activities: Principal payments under mortgages -- -- (15) -- (15) Principal payments under term loan (500) -- -- -- (500) Repayment of existing debt under merger (69,316) -- -- -- (69,316) Issuance of notes 173,845 -- -- -- 173,845 Issuance of term loan 200,000 -- -- -- 200,000 Payment of deferred financing fees (29,305) -- -- -- (29,305) Contributed Capital 138,200 -- -- -- 138,200 Payment of capital lease obligations (29) -- -- -- (29) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 412,895 -- (15) -- 412,880 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash -- -- 17 (24) (7) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents 3,829 (1,138) (947) -- 1,744 Cash and cash equivalents at beginning of year 1,241 (115) 1,251 -- 2,377 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year $ 5,070 $ (1,253) $ 304 $ -- $ 4,121 ======== ======== ======== ======== ========

Guarantor Non-Guarantor Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------- ----------- ------------ Cash flows from operating activities: Net earnings $ 6,899 $ (4,584) $ (338) $ 1,977 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 673 40 35 748 Amortization of display fixtures 723 41 764 Amortization of deferred financing fees 20 20 Deferred income taxes (13,030) (13,030) Provision for (recovery from) doubtful accounts 25 1 26 Tax benefit on stock options exercised 57 57 Other non-cash operating items (9) 228 219 Changes in operating assets and liabilities: Accounts receivable 2,740 2,635 598 5,973 Inventories (4,838) (104) (1,121) (6,063) Prepaid expenses and other current assets (32) (377) 30 (379) Other assets (1,609) 3 (80) (1,686) Accounts payable (1,945) 1,150 1,200 405 Accrued liabilities 21,827 (133) 26 21,720 Deferred liability 1,367 1,367 Pension liability (net) (330) (330) Income taxes receivable / payable (11,344) (254) (11,598) Intercompany receivables / payables (1,909) 1,665 256 (12) -- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (715) 295 622 (12) 190 -------- -------- -------- -------- -------- Cash flows provided by (used in) investing activities: Property, plant and equipment additions (781) (12) (4) (797) -------- -------- -------- -------- -------- Net cash used in investing activities (781) (12) (4) -- (797) -------- -------- -------- -------- -------- Cash flows provided by (used in) financing activities: Principal payments under mortgages (25) 2 (23) Principal payments under revolving credit agreement (800) (800) Proceeds from the exercise of stock options 12 12 Acquisition of treasury stock (57) (57) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities (870) -- 2 -- (868) -------- -------- -------- -------- -------- Effect of exchange rate changes on cash -- -- (33) 12 (21) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (2,366) 283 587 -- (1,496) Cash and cash equivalents at beginning of year 3,607 (398) 664 3,873 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year $ 1,241 $ (115) $ 1,251 $ -- $ 2,377 ======== ======== ======== ======== ========

Guarantor Non-Guarantor Issuer Subsidiaries Subsidiaries Eliminations Consolidated -------- ------------ ------------- ----------- ------------ Cash flows from operating activities: Net earnings $ (386) $ 866 $ 200 $ 680 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Depreciation and amortization 1,825 109 108 1 2,043 Amortization of display fixtures 1,953 -- 115 2,068 Amortization of deferred financing fees 58 -- -- 58 Provision for (recovery from) doubtful accounts (17) (14) -- (31) Tax benefit on stock options exercised 170 -- -- 170 Other non-cash operating items 141 -- (2) 139 Changes in operating assets and liabilities: Accounts receivable 2,789 1,105 (35) 3,859 Inventories (6,928) (683) (558) (8,169) Prepaid expenses and other current assets 45 (27) 4 22 Other assets (4,720) 9 (199) (4,910) Accounts payable (2,033) 767 473 (793) Accrued liabilities 1,909 (701) (126) 1,082 Deferred liability 29 -- -- 29 Pension liability (net) 263 -- -- 263 Income taxes receivable / payable (1,346) 382 27 (937) Intercompany receivables / payables 1,258 (1,349) 91 -- -------- -------- -------- -------- -------- Net cash provided by (used in) operating activities (4,990) 464 98 1 (4,427) -------- -------- -------- -------- -------- Cash flows provided by (used in) investing activities: Property, plant and equipment additions (2,851) (82) (23) (2,956) -------- -------- -------- -------- -------- Net cash used in investing activities (2,851) (82) (23) -- (2,956) -------- -------- -------- -------- -------- Cash flows provided by (used in) financing activities: Principal borrowings under revolving credit agreement, net 6,800 -- -- 6,800 Principal payments under mortgages -- -- (9) (9) Payment of capital lease obligations (28) -- -- (28) Proceeds from the exercise of stock options 73 -- -- 73 Acquisition of treasury stock (166) -- -- (166) -------- -------- -------- -------- -------- Net cash provided by (used in) financing activities 6,679 -- (9) -- 6,670 -------- -------- -------- -------- -------- Effect of exchange rate changes on cash -- -- (6) (1) (7) -------- -------- -------- -------- -------- Net increase (decrease) in cash and cash equivalents (1,162) 382 60 -- (720) Cash and cash equivalents at beginning of year 1,750 (254) 617 2,113 -------- -------- -------- -------- -------- Cash and cash equivalents at end of year $ 588 $ 128 $ 677 $ -- $ 1,393 ======== ======== ======== ======== ========

THREE MONTHS THREE MONTHS ENDED ENDED MARCH 31, 2005 MAR 31, 2004 ------------------------------------------------- ------------ ($000) ($000) Feb 1,2005 Jan 1, 2005 Jan 1, 2004 Mar 31, 2005 Jan 31, 2005 Mar 31, 2004 ------------ ------------ ------------ SUCCESSOR PREDECESSOR PREDECESSOR PERIOD PERIOD COMBINED PERIOD ------ ------ -------- ------ Net Sales Cosmetic segment $ 55,387 $ 14,756 $ 70,143 $ 65,238 Pharmaceutical segment 15,530 3,450 18,980 17,827 -------- -------- -------- -------- Total net sales 70,917 18,206 89,123 83,065 Cost of goods sold 38,730 9,718 41,215 Selling and administrative expenses 28,905 11,475 39,680 Severance expenses -- -- (10) Merger expenses 3,927 18,974 -- -------- -------- -------- Operating income (loss) (645) (21,961) 2,180 Other income (expense): Interest expense, net (4,850) (264) (1,023) Other income (expense), net 170 (232) (50) -------- -------- -------- Earnings (Loss) before income taxes (5,325) (22,457) 1,107 Income taxes (benefit) (2,103) (24,434) 427 -------- -------- -------- Net earnings (Loss) (3,222) 1,977 $ 680 ======== ======== ========

CONSOLIDATED EBITDA CONSOLIDATED TOTAL TO CONSOLIDATED DEBT TO CONSOLIDATED INTEREST COVERAGE EBITDA LEVERAGE EXPENSE RATIO NOT TEST PERIOD RATIO NOT MORE THAN LESS THAN ----------- ------------------- --------- June 30, 2005 6.00 to 1.00 2.00 to 1.00 September 30, 2005 - September 30, 2006 5.75 to 1.00 2.00 to 1.00 December 31, 2006- September 30, 2007 4.75 to 1.00 2.50 to 1.00 December 31, 2007 - September 30, 2008 4.50 to 1.00 2.75 to 1.00 December 31, 2008 - September 30, 2009 4.00 to 1.00 3.00 to 1.00 December 31, 2009 - June 30, 2011 3.50 to 1.00 3.00 to 1.00

Payments Due by Period ---------------------- ($000) Less 1 - 2 2 - 3 3 - 5 After 5 Total 1 Year Years Years Years Years ----- ------ ----- ----- ----- ----- Senior subordinated notes $175,000 $ -- $ -- $ -- $ -- $175,000 Term loan facility 199,500 2,000 2,000 2,000 4,000 189,500 Mortgage on land and buildings 1,243 52 55 58 1,078 -- Capital leases 298 122 130 46 -- -- Operating leases 33,266 4,237 3,825 3,407 6,137 15,660 -------- -------- -------- -------- -------- -------- Total contractual obligations (a) $409,307 $ 6,411 $ 6,010 $ 5,511 $ 11,215 $380,160 ======== ======== ======== ======== ======== ========

ISSUER PURCHASES OF EQUITY SECURITIES Total Number of Shares (or Units) Purchased Total Number of Shares Average Price Paid per as Part of Publicly Period (or Units) Purchased Share (or Unit) Announced Programs January 9,399 $34.62 -- February -- -- -- March -- -- -- ------ ------ ------ Total 9,399(1) $34.62 (2) ------ ------ ------

Filing Compare · DEL LABORATORIES INC