1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
1995 ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
July 31, 1995 0-12862
DEP CORPORATION
A DELAWARE CORPORATION 95-2040819
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2101 EAST VIA ARADO
RANCHO DOMINGUEZ, CALIFORNIA 90220
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, (310) 604-0777
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Class A Common Stock ($.01 par value)
Class B Common Stock ($.01 par value)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. / /
At October 13, 1995, the aggregate market value of common stock held by
non-affiliates of the registrant was approximately $3,539,945 for non-voting
Class A Common Stock and $4,069,017 for voting Class B Common Stock.
At October 13, 1995, the number of shares of common stock of the registrant
issued and outstanding were 3,117,059 of Class A Common Stock and 3,134,081 of
Class B Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, which the Registrant
anticipates mailing in November 1995, are incorporated by reference in Part III
of this Report.
Index to Exhibits appears on page 33.
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The undersigned registrant hereby amends items 5,7,8 and 14 of its
Annual Report on Form 10-K for the year ended July 31, 1995, to reflect
additional disclosure regarding the market for the Company's common equity and
the execution of the Fifth Amendment to the Revolving Credit and Term Loan
Agreement previously reported as an agreement in principle, as follows:
PART II
ITEM 5 MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A and Class B Common Stock of the Company was traded on the
Nasdaq National Market until November 2, 1995, and since such date has been
traded on the Nasdaq SmallCap Market under the symbols DEPCA and DEPCB,
respectively. The following table sets forth the high and low closing sale
prices of the Class A Common Stock and Class B Common Stock:
1995 1994
----------------- -----------------
HIGH LOW HIGH LOW
----- ----- ----- -----
CLASS A First Quarter 3 7/8 2 5/8 7 1/2 5 1/4
Second Quarter 3 3/8 2 1/4 6 3/4 5
Third Quarter 2 3/8 1 1/2 5 3/4 2 1/4
Fourth Quarter 3 15/16 4 1/2 2 1/2
CLASS B First Quarter 4 1/4 2 3/4 7 1/4 5 1/2
Second Quarter 3 3/4 2 3/8 6 1/2 5 1/4
Third Quarter 2 7/8 1 5/8 5 3/4 2 9/16
Fourth Quarter 3 1/4 1 1/8 4 3/8 2 1/2
The closing sales prices per share for the Class A Common Stock and
Class B Common Stock on October 13, 1995, were $1 3/4 and $1 7/8, respectively.
On October 13, 1995, there were a total of 140 and 161 record holders of Class
A Common Stock and Class B Common Stock, respectively.
Since its formation the Company has not paid cash dividends on its
common stock and it does not currently anticipate paying such dividends. The
Company's current policy is to retain earnings to provide funds for the
operation and expansion of the Company's business. In addition, the Company's
Bank Facility presently prohibits, among other things, the payment of any
dividend or other distribution of assets, properties or cash in respect of any
class of capital stock. (See "Note 6 of the Notes to Consolidated Financial
Statements.")
The Company's common stock was transferred from the Nasdaq National
Market to the Nasdaq SmallCap Market as a result of the Company's
non-compliance with the minimum net tangible assets requirement for continued
listing on the National Market. The Company is in the process of listing the
common stock on the Pacific Stock Exchange. While there can be no assurance
that its application will be accepted, the Company expects such listing to
become effective in late November 1995.
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On November 15, 1994, Continental Stock Transfer & Trust Company
became the Company's Registrar and Transfer Agent.
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ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
FISCAL 1995 COMPARED TO FISCAL 1994
Consolidated net sales for 1995 were $127,689,000 compared to
$138,331,000 in 1994. Consumer Products net sales in 1995 decreased by 9%
compared to 1994. Consumer Products accounted for 97% and 98% of the
consolidated net sales for 1995 and 1994, respectively.
Hair care net sales decreased 6% in 1995, principally due to lower
sales of Agree and Halsa. Aggregate net sales of Agree and Halsa were
approximately $26,800,000 in 1995, or 25% lower than the prior year. Hair care
net sales, excluding Agree and Halsa, increased 4% in 1995, compared to 1994,
primarily as a result of double digit domestic unit volume growth in both the
L.A. Looks styling and Dep gel product lines, offset in part by declines in
Lilt and hair care products which were discontinued in 1994.
Skin care net sales increased 17% in 1995 over the prior year
primarily as a result of unit growth in the Natures Family brand.
Oral care net sales for 1995 decreased by 38% compared to 1994.
Although net sales of all oral care brands declined, Lavoris mouthwash and
Jordan toothbrushes accounted for approximately 80% of such decline. Oral care
brands were adversely impacted by intense competition and new product
introductions by competitors. Crystal Fresh Lavoris and Jordan toothbrushes
are selling at minimal levels compared to the prior year and no longer
represent a significant component of oral care sales.
Domestic net sales of Consumer Products decreased 13% in 1995, again,
primarily as a result of the decline in the net sales of Agree and Halsa. In
1995, domestic net sales of Agree and Halsa were approximately $15,600,000, or
42% lower than 1994. Such decline was offset, in part, by sales growth of the
L.A. Looks styling and Dep gel products. Domestic net sales of hair care
products, excluding Agree and Halsa, increased 2% in 1995, compared to the
prior year. Also contributing to the decrease in domestic net sales of Consumer
Products was a 41% decline in oral care in 1995 as compared to 1994, for the
same reasons described in the preceding paragraph.
International net sales of Consumer Products in 1995 increased 29%
compared to 1994 primarily due to an increase in Agree sales in Japan and
Australia. From August 6, 1993 until December 31, 1993, Agree products in Japan
and Australia were distributed by licensees and the Company received only
royalty payments equal to a percentage of the licensees' net sales. During the
last seven months of fiscal 1994 and all twelve months of 1995, the Company
sold the Agree products through a distributor and agent, and recognized sales
and cost of sales on those products. In addition, the Company entered into a
joint venture in China, effective November 1993.
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Gross profits for 1995 were $80,194,000, compared to $87,646,000 in
1994. As a percentage of net sales, gross profit for both 1995 and 1994 was
63%. The gross profit percentage in the current period was somewhat lower than
historic rates due to a lower proportion of sales of higher margin products,
while in 1994 gross profit was adversely impacted by a provision for packaging
changeover costs. In dollar terms gross profit in 1995 declined as a result of
lower sales volume.
In 1995, selling, general and administrative expenses ("SG&A")
decreased to $78,728,000 or 62% of net sales from $88,525,000 or 64% in the
prior year. The decrease in SG&A, as a percentage of sales, was primarily due
to a decrease in advertising and consumer promotion expense. The dollar
decrease in SG&A relates to the impact of lower net sales on variable expenses
and lower advertising and consumer promotional expense.
For 1995, SG&A was also favorably impacted by the higher proportion of
international sales, as such sales typically incur lower SG&A expense than
domestic sales. International operations include export sales, where third
party distributors generally incur the advertising and promotional
expenditures, and royalty income where there are no related selling costs
recorded by the Company.
In February 1995, the Company initiated a plan to reduce operating
expenses. As part of that plan, the Company laid-off approximately 9% of its
non-production work force, reduced the annual base salary of four top executive
officers by 10%, and reduced the salary of its Chairman and President by 15%.
The estimated effect of these actions will be to reduce costs by approximately
$1,200,000 annually. The benefit of such work force and salary reductions in
1995, net of severance costs, approximated $360,000.
During the third quarter of fiscal 1995, the Company determined that
in light of the significant declines in the sales volume and profit
contribution of the Agree and Halsa products since their acquisition in August
1993, there had been an impairment in the carrying value of the Agree and Halsa
intangible assets. Based on the results of an independent valuation, the
Company concluded that the fair value of the intangible assets of Agree and
Halsa was approximately $12,500,000, requiring a write-down in the carrying
value of the intangibles of $24,718,000. Such write-down was included in
operations for 1995. In addition, due to the repackaging and restaging of such
products, the Company also wrote-off tools and molds of $448,000.
For 1995, net other expenses were $6,123,000 as compared to $4,494,000
in 1994. The increased expense was due to higher interest expense which
resulted from a higher effective interest rate during the current year.
The Company recorded a tax benefit of $2,865,000 for 1995 and
$1,790,000 for 1994. In accordance with generally accepted accounting
principles, the tax benefit of the write-down of the Agree and Halsa
intangibles in 1995 was limited to that currently realizable. The tax benefit
for 1994 was offset in part by the effect of intangible amortization expense
included in financial income, but not deductible for tax purposes. (See "Note
7 of the Notes to Consolidated Financial Statements.")
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For 1995, the Company recorded a net loss of $26,958,000 or $4.32 per
share, compared to a net loss of $3,583,000 or $.57 per share in 1994. The
loss in 1995 was primarily due to the $24,072,000 after-tax write-down of the
Agree and Halsa assets, lower net sales, higher interest expense and a lower
tax benefit. Excluding the write-down of the Agree and Halsa assets, the
Company's operations for 1995 resulted in a net loss of $2,886,000 or $.47 per
share.
FISCAL 1994 COMPARED TO FISCAL 1993
Consolidated net sales for 1994 increased to $138,331,000, compared to
$123,713,000 in 1993. In 1994 the Company's Consumer Products net sales grew
13% over 1993, entirely as a result of unit volume growth resulting from the
acquisition of the Agree and Halsa trademarks in August 1993, but this growth
was slightly offset by a decrease in net sales of Private Label products.
Consumer Products accounted for 98% and 96% of the consolidated net sales for
1994 and 1993, respectively.
In 1994, net sales of domestic Consumer Products increased 6% and net
sales of international Consumer Products increased 161%. The increase in
international net sales arose primarily from sales of Agree products in
Australia and Japan. From the acquisition date until December 31, 1993, such
products were distributed by licensees and the Company received royalty
payments equal to a percentage of the licensees' net sales. Thereafter, the
Company sold such products through a distributor and agent, and recognized the
related revenues. In addition, international net sales also benefitted from
sales in Canada of Agree and Halsa, and the commencement of a joint venture in
China, effective November 1993. International net sales for 1994 represented
approximately 11% of total consolidated net sales, compared to 5% for 1993.
In 1994, hair care represented 75% of total Consumer Products net
sales compared to 68% in 1993. Hair care sales in 1994 increased 25% to
$100,782,000 compared to $80,476,000 in 1993. The increase in hair care sales
was the result of unit volume growth arising from the acquisition of the Agree
and Halsa shampoo and conditioner trademarks, with such sales approximating $36
million. This increase was offset in part by declines of the Company's other
hair care brands, including approximately $7,500,000 of sales primarily
relating to the discontinuance of the Dep brand of shampoos and conditioners
and the domestic non-gel Dep styling products. Fiscal 1994 sales were further
adversely impacted due to the continued effects of stringent domestic retailer
inventory reductions, the highly competitive business environment, and the
substantial efforts devoted to integrating Agree and Halsa into the Company's
operations.
Net sales of oral care products in 1994 were $19,832,000, or 9% lower
than the $21,910,000 of 1993. The lower volume primarily resulted from the
absence in 1994 of the non-recurring sales of Crystal Fresh Lavoris introduced
in 1993. The oral care sales decrease was offset in part by sales of Jordan
Magic toothbrushes and TopolPLUS whitening toothpaste. In 1994, skin care net
sales were $13,974,000 compared to $15,680,000 for 1993. The lower skin care
sales in 1994 were the result of lower unit sales of the Company's three skin
care brands.
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Gross profits for 1994 were $87,646,000 as compared to $78,666,000 for
the prior year. As a percentage of net sales, gross profits were 63% and 64%
for the current and prior years, respectively. The decrease in gross profit
percentage in 1994 was principally the result of a provision for packaging
inventory obsolescence. Such additional cost was offset, in part, by sales of
new products, principally, Agree, Jordan Magic toothbrushes, and TopolPLUS,
whose individual gross profit margins were greater than the Company's average.
In 1994, SG&A expenses increased to $88,525,000 or 64% of net sales,
compared to $74,388,000 or 60% in 1993. The higher SG&A percentage in the
current year was primarily due to increased advertising and promotional
expenses in response to the highly competitive business environment, and
increased amortization expenses due to the Agree and Halsa intangibles acquired
in 1994.
Fiscal 1993 also included a $1,003,000 charge against income relating
to the discontinuance and write-down of the DietAyds and Bantron intangibles,
the Company's two smallest brands. No similar charge occurred in 1994.
Net other expenses increased to $4,494,000 compared to $1,706,000 in
the prior year. The increase was primarily due to higher interest expense
resulting from the Agree and Halsa acquisition. In addition, 1993 included a
non-recurring charge of $365,000 related to the Company's reclassification of
its common stock.
In 1994, due to the loss before income taxes, the Company recorded a
tax credit utilizing an effective tax rate of 33%, compared to a tax expense in
1993 at an effective tax rate of 25%. The tax benefit for the current period
was offset in part by the effect of intangible amortization expense included in
financial income, but not deductible for tax purposes. The low effective tax
rate of 1993 resulted from the tax benefit arising from the write-down of the
DietAyds and Bantron trademarks and goodwill.
The Company recorded a net loss of $3,583,000 or $.57 per share in
1994, compared to net income of $1,170,000 or $.18 per share in the prior year.
The net loss was principally due to lower than anticipated sales of the Agree
and Halsa brands, higher interest and amortization expense related to the
acquisition and higher advertising and promotional expenses.
LIQUIDITY AND CAPITAL RESOURCES
By its terms, the Company's Revolving Credit and Term Loan Agreement
dated as of August 6, 1993, as amended (the "Bank Facility"), between the
Company and a group of seven banks (the "Bank Group") obliges the Company to
comply with certain financial covenants. As a result of the 1995 operating
loss, the Company would not have been in compliance with certain of such
covenants had the Bank Group not granted waivers of such technical defaults
through October 31, 1995.
On November 3, 1995, the Company and the Bank Group entered into the
Fifth Amendment to the Bank Facility effective as of October 30, 1995, (the
"Fifth Amendment") which provides, among other things, for the termination of
the Bank Facility on December 30,
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1996, a decrease in the working capital commitment to $25,000,000 from
$28,000,000, an increase in interest rates and lower quarterly scheduled term
loan payments through April 1, 1996. The $9,567,000 payment originally due on
December 29, 1995, has been reduced to $500,000 and a principal payment of
$8,300,000 will now be due on April 15, 1996. (See "Note 6 of the Notes to
Consolidated Financial Statements.") The interest rate under the Fifth
Amendment for the period October 1, 1995 through June 30, 1996 will be base
rate plus 3%; July 1, 1996 through September 30, 1996, base rate plus 4%; and
thereafter base rate plus 5%. As of July 31, 1995, the base rate was 8 3/4%.
Since the inception of the Bank Facility in August 1993, the Company
has consistently made timely payment to the Bank Group of all principal and
interest due under the Bank Facility. In light of the Company's current
projected earnings and cash flow, management believes the Company has the
financial resources to maintain its current level of operations until the April
15, 1996 principal payment is due. However, cash generated from operations
alone will not be sufficient to pay the $8,300,000 on April 15, 1996, or the
balance due on December 30, 1996. As a result, the Company is evaluating
alternatives which, if successful, would result in the payment, the
refinancing, or the restructuring of the Bank Facility. The Company has
retained legal counsel specializing in restructurings to render advice
regarding alternatives available to the Company. In addition, the Company has
retained Donaldson, Lufkin & Jenrette Securities Corporation to assist it in
exploring strategic alternatives which include, among other things, a business
combination, sale of assets, strategic investment in the Company or a
refinancing of the Bank Facility. There can be no assurance that the Company
will be successful in its attempt to consummate any of the strategic
alternatives or a refinancing of the Bank Facility.
All amounts due under the Bank Facility, including the balance due on
December 30, 1996, have been classified as current debt. Due to the
reclassification of $48,919,000 of the outstanding balance of the Bank Facility
as current debt, as of July 31, 1995, the Company had a working capital
deficiency of $35,682,000. Working capital was also impacted by decreases in
income taxes receivable and other assets offset, in part, by an increase in
accounts receivable. The decrease in income taxes receivable relates to a
lower pre-tax loss, excluding the write-off of assets in 1995, while the
decrease in other assets primarily relates to a reduction in prepaid
advertising and promotion costs at July 31, 1995. The increase in accounts
receivable primarily relates to an increased proportion of international sales,
which sales have longer payment terms than the domestic business.
Substantially all of the Company's assets not otherwise pledged as
collateral on existing mortgages are pledged as collateral under the Bank
Facility. Furthermore, the Company's ability to borrow additional funds from
third parties is significantly limited by the terms of the Bank Facility.
As of October 20, 1995, the Company had cash and cash equivalents
totalling approximately $5,300,000.
In 1995, purchases of property and equipment totalled $716,000
compared to $1,643,000 in 1994.
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ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORTS
Independent Auditors' report with respect to financial statements and
schedule.
FINANCIAL STATEMENTS
Consolidated Balance Sheets at July 31, 1995 and 1994
Consolidated Statements of Income for Years Ended
July 31, 1995, 1994 and 1993
Consolidated Statements of Stockholders' Equity for Years
Ended July 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for Years Ended
July 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements
SCHEDULE
Schedule II - Valuation and Qualifying Accounts and Reserves
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
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PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Schedules and Exhibits.
1. The financial statements listed in Item 8 above are
incorporated herein by this reference.
2. The financial schedule listed in Item 8 above is incorporated
herein by this reference. Schedule I is not listed because it
is not required.
3. Exhibit
Number Title
------- -----
3.1 Certificate of Incorporation (1)
3.2 Certificate of Amendment (2)
3.3 Bylaws (9)
3.4 Certificate of Amendment to the Certificate
of Incorporation (10)
3.5 Bylaws (10)
4.1 Form of Common Stock Certificates (6)
10.1 Profit Sharing Plan for Employees of
Dep Corporation as of August 1, 1989 (4)
10.2 1983 Stock Option Plan, as amended (3) *
10.3 1988 Director and Officer Stock Option
Plan, as amended (3) *
10.4 1992 Stock Option Plan (6) *
10.5 Stock Target Ownership Plan (9) *
10.6 Fiscal Year 1995 Bonus Arrangement for
Certain Executive Officers * **
10.7 Lease Agreement relating to the Company's
California warehouse (3)
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Exhibit
Number Title
------- -----
10.8 Dep Corporation Executive Deferral Plan (3) *
10.9 401(k) Plan for Employees of Dep Corporation (6) *
10.10 Asset Purchase Agreement, dated as of July 9,
1993, between S.C. Johnson & Son, Inc.
and the Company (5)
10.11 Revolving Credit and Term Loan Agreement, dated
as of August 6, 1993, among the Company as
borrower, The First National Bank of Boston
and City National Bank, as co-agents and
Citicorp USA, Inc. as agent. (5)
10.12 Waiver and Amendment, dated as of March 17,
1994, of the Revolving Credit and Term Loan
Agreement, dated as of August 6, 1993. (7)
10.13 Waiver and Amendment, dated as of May 27,
1994, of the Revolving Credit and Term Loan
Agreement, dated as of August 6, 1993. (7)
10.14 Waiver and Amendment, dated as of August 26,
1994, of the Revolving Credit and Term Loan
Agreement, dated as of August 6, 1993. (8)
10.15 Fourth Amendment, dated as of September 9,
1994, of the Revolving Credit and Term Loan
Agreement, dated as of August 6, 1993. (8)
10.16 Form of Officers and Directors Indemnification
Agreement. (10)
10.17 Waiver, dated as of September 29, 1995, of the
Revolving Credit and Term Loan Agreement,
dated as of August 6, 1993.**
10.18 Dep Corporation Retention and Severance Plan* **
10.19 Form Change in Control Executive Severance Agreement* **
10.20 Form Change in Control Executive Retention
Bonus Agreement* **
10.21 Fifth Amendment, dated as of October 30,1995, of the
Revolving Credit and Term Loan Agreement dated as of
August 6,1993
11 Computation of Per Share Earnings **
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Exhibit
Number Title
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21.1 Subsidiaries (9)
23.1 Consent of Independent Auditors**
27 Financial Data Schedule**
(1) Incorporated by reference to Exhibit 3.1 to the Company's
Annual Report on Form 10-K for the year ended July 31, 1988.
(2) Incorporated by reference to Exhibit 4 to the Company's
Current Report on Form 8-K filed on December 15, 1992.
(3) Incorporated by reference to Exhibits 10.2, 10.3, 10.7 and
10.8 to the Company's Annual Report on Form 10-K for the year
ended July 31, 1992.
(4) Incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the year ended July 31, 1990.
(5) Incorporated by reference to Exhibits 2.1 and 10.9 to the
Company's Current Report on Form 8-K filed on August 6, 1993.
(6) Incorporated by reference to Exhibits 4.1, 10.4 and 10.9 to
the Company's Annual Report on Form 10-K for the year ended
July 31, 1993.
(7) Incorporated by reference to Exhibits to the Company's Current
Report on Form 8-K filed on May 27, 1994.
(8) Incorporated by reference to Exhibits to the Company's Current
Report on Form 8-K filed on September 14, 1994.
(9) Incorporated by reference to Exhibits 3.3, 10.5 and 21.1 to
the Company's Annual Report on Form 10-K for the year ended
July 31, 1994.
(10) Incorporated by reference to Exhibits to the Company's Current
Report on Form 8-K filed on January 16, 1995.
* Management contract or compensatory plan.
** Previously filed under original Form 10-K filed on October
30, 1995.
(b) Reports on Form 8-K.
None.
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Dep Corporation
Rancho Dominguez, California
We have audited the accompanying consolidated balance sheets of Dep Corporation
and subsidiaries as of July 31, 1995 and 1994, and the related consolidated
statements of income, stockholders' equity and cash flows for each of the years
in the three-year period ended July 31, 1995. In connection with our audits of
the consolidated financial statements, we have also audited the financial
statement schedule listed in Item 8. These consolidated financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Dep Corporation and
subsidiaries as of July 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the years in the three-year period ended July
31, 1995, in conformity with generally accepted accounting principles. Also in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 6 to
the consolidated financial statements, the Company was in technical default of
certain financial covenants in connection with its bank facility which have
been waived by the lenders through October 31, 1995. As more fully discussed
in Note 6 to the consolidated financial statements, the Company and the lenders
who are a party to the bank facility have entered into an amendment (the "Fifth
Amendment") to modify the maturity dates of amounts outstanding under the bank
facility and to modify the financial covenants. In addition, as revised by the
Fifth Amendment, the Company has a mandatory payment of $8,300,000 due on April
15, 1996. Based on current estimates of available cash flow, management does
not believe it will have sufficient cash to make the mandatory payment.
Accordingly, the entire amount outstanding under the bank facility of
$60,969,000 has been classified as a current liability in the accompanying
consolidated financial statements. Management's plans in regard to these
matters are described in Note 16 to the consolidated financial statements.
These matters raise substantial doubt about the Company's ability to continue
as a going concern. The consolidated financial statements and financial
statement schedule do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ KPMG Peat Marwick LLP
Long Beach, California
September 21, 1995, except for Notes 6
and 16, which date is November 6, 1995
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DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31,
----------------------------
Assets 1995 1994
----------- ------------
Current assets:
Cash and cash equivalents.......................................... $ 4,611,000 $ 947,000
Accounts receivable, less allowance for doubtful accounts
of $478,000 in 1995 and $262,000 in 1994...................... 18,811,000 16,769,000
Inventories ....................................................... 13,071,000 13,956,000
Income taxes receivable............................................ 1,779,000 3,180,000
Deferred income taxes.............................................. 188,000 539,000
Other current assets .............................................. 2,275,000 3,606,000
----------- ------------
Total current assets............................................. 40,735,000 38,997,000
Property and equipment, net.......................................... 15,423,000 17,211,000
Intangibles, net..................................................... 34,156,000 62,015,000
Other assets......................................................... 3,590,000 3,872,000
----------- ------------
$93,904,000 $122,095,000
=========== ============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of long-term debt.................................. $61,100,000 $ 3,828,000
Accrued expenses................................................... 7,920,000 7,719,000
Accounts payable .................................................. 7,397,000 7,034,000
----------- ------------
Total current liabilities........................................ 76,417,000 18,581,000
Long-term debt, net of current portion............................... 3,744,000 60,974,000
Deferred income taxes................................................ - 1,252,000
Other non-current liabilities........................................ 2,516,000 3,133,000
----------- ------------
Total liabilities................................................ 82,677,000 83,940,000
Stockholders' equity:
Preferred stock, par value $.01; authorized
3,000,000 shares; none outstanding............................ - -
Class A common stock, par value $.01; authorized 14,000,000
shares; issued and outstanding 3,232,559 at July 31, 1995
and 3,231,203 at July 31, 1994............................... 32,000 32,000
Class B common stock, par value $.01; authorized 7,000,000
shares; issued and outstanding 3,243,340 at July 31, 1995
and 3,231,201 at July 31, 1994............................... 32,000 32,000
Additional paid-in capital......................................... 12,126,000 12,137,000
Retained earnings.................................................. 215,000 27,173,000
Foreign currency translation adjustment............................ (173,000) (214,000)
----------- ------------
12,232,000 39,160,000
Less treasury stock, at cost, 115,500 shares each of Class A
and Class B common stock......................................... (1,005,000) (1,005,000)
----------- ------------
Total stockholders' equity....................................... 11,227,000 38,155,000
----------- ------------
$93,904,000 $122,095,000
=========== ============
The accompanying notes are an integral part of the
Consolidated Financial Statements.
14
15
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended July 31,
----------------------------------------------
1995 1994 1993
------------ ------------ ------------
Net sales..................................... $127,689,000 $138,331,000 $123,713,000
Cost of sales................................. 47,495,000 50,685,000 45,047,000
------------ ------------ ------------
Gross profit.................................. 80,194,000 87,646,000 78,666,000
Selling, general and administrative........... 78,728,000 88,525,000 74,388,000
Write-down in value of assets................. 25,166,000 - 1,003,000
------------ ------------ ------------
Income (loss) from operations................. (23,700,000) (879,000) 3,275,000
Other expenses (income):
Interest expense, net....................... 6,177,000 4,578,000 1,268,000
Other....................................... (54,000) (84,000) 438,000
------------ ------------ ------------
6,123,000 4,494,000 1,706,000
------------ ------------ ------------
Income (loss) before income taxes (credit).... (29,823,000) (5,373,000) 1,569,000
Income taxes (credit)......................... (2,865,000) (1,790,000) 399,000
------------ ------------ ------------
Net income (loss) ............................ $(26,958,000) $ (3,583,000) $ 1,170,000
============ ============ ============
Net income (loss) per share.................. $ (4.32) $ (.57) $ .18
============ ============ ============
Weighted average shares outstanding.......... 6,244,106 6,250,239 6,367,082
============ ============ ============
The accompanying notes are an integral part of the
Consolidated Financial Statements.
15
16
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1995, 1994 AND 1993
FOREIGN
CLASS A CLASS B ADDITIONAL CURRENCY TREASURY
COMMON COMMON COMMON PAID-IN RETAINED TRANSLATION STOCK, AT COST
STOCK STOCK STOCK CAPITAL EARNINGS ADJUSTMENT (CLASS A &B)
-------- ------- ------- ----------- ------------ ----------- --------------
Balance at July 31, 1992 $ 65,000 $ - $ - $12,046,000 $ 29,586,000 $ (38,000) $(1,005,000)
Cumulative translation adjustment (184,000)
Reclassification (65,000) 32,000 32,000 1,000
Net income for the year 1,170,000
-------- ------- ------- ----------- ------------ --------- -----------
Balance at July 31, 1993 - 32,000 32,000 12,047,000 30,756,000 (260,000) (1,005,000)
Cumulative translation adjustment 8,000
Issuance of stock 90,000
Net loss for the year (3,583,000)
-------- ------- ------- ----------- ------------ --------- -----------
Balance at July 31, 1994 - 32,000 32,000 12,137,000 27,173,000 (214,000) (1,005,000)
Cumulative translation adjustment 41,000
Adjustment to stock issuance (11,000)
Net loss for the year (26,958,000)
-------- ------- ------- ----------- ------------ --------- -----------
Balance at July 31, 1995 $ - $32,000 $32,000 $12,126,000 $ 215,000 $(173,000) $(1,005,000)
-------- ------- ------- ----------- ------------ --------- -----------
The accompanying notes are an integral part of the
Consolidated Financial Statements.
16
17
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31,
-----------------------------------------------
1995 1994 1993
------------ ------------ -----------
Operating Activities:
Net income (loss)........................................... $(26,958,000) $ (3,583,000) $ 1,170,000
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization........................... 5,507,000 5,571,000 3,216,000
Write-down in value of assets........................... 25,166,000 - 1,003,000
Provision for losses on accounts receivable............. 504,000 31,000 75,000
Deferred income taxes .................................. (1,783,000) 342,000 1,025,000
Loss on sale of assets.................................. 90,000 89,000 205,000
Changes in operating assets and liabilities, net of
effects from the acquisition:
Accounts receivable .................................... (2,540,000) 395,000 (2,345,000)
Inventories ............................................ 894,000 521,000 2,153,000
Income taxes receivable................................. 1,401,000 (818,000) (2,364,000)
Other assets............................................ 1,331,000 (1,523,000) (680,000)
Accrued expenses........................................ 701,000 (1,260,000) (943,000)
Accounts payable........................................ 370,000 1,397,000 378,000
Income taxes payable.................................... - - (334,000)
------------ ------------ -----------
Net cash provided by operating activities................... 4,683,000 1,162,000 2,559,000
Investing Activities:
Purchases of property and equipment..................... (716,000) (1,643,000) (3,643,000)
Acquisition of trademarks............................... (200,000) (45,746,000) -
Proceeds from sale of property and equipment............ - 21,000 62,000
Proceeds from sale of trademarks........................ 435,000 1,642,000 -
Other .................................................. (112,000) (658,000) (740,000)
------------ ------------ -----------
Net cash used in investing activities....................... (593,000) (46,384,000) (4,321,000)
Financing Activities:
Proceeds from lines of credit and long-term debt........ 42,000 45,120,000 1,326,000
Other................................................... (487,000) - -
------------ ------------ -----------
Net cash provided by (used in) financing activities......... (445,000) 45,120,000 1,326,000
------------ ------------ -----------
Increase (decrease) in cash and cash equivalents............ 3,645,000 (102,000) (436,000)
Effect of exchange rate changes on cash..................... 19,000 (13,000) (56,000)
Cash and cash equivalents at beginning of year.............. 947,000 1,062,000 1,554,000
------------ ------------ -----------
Cash and cash equivalents at end of year.................... $ 4,611,000 $ 947,000 $ 1,062,000
============ ============ ===========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest, net........................................... $ 6,357,000 $ 4,446,000 $ 1,226,000
============ ============ ===========
Income taxes (refunds).................................. $ (2,546,000) $(1,189,000) $ 1,996,000
============ ============ ===========
The accompanying notes are an integral part of the
Consolidated Financial Statements.
17
18
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Company
The Company develops, manufactures, distributes and markets hair,
skin, oral and other personal care products. The Company's
products are primarily sold by drug, food and mass merchandise
stores.
Principles of consolidation
The consolidated financial statements include the accounts of Dep
Corporation, its wholly-owned subsidiaries and joint venture. All
significant intercompany balances and transactions have been
eliminated.
Foreign currency translation
All assets and liabilities in the balance sheets of foreign
subsidiaries whose functional currency is other than the U.S.
dollar are translated at year-end exchange rates. Translation
gains and losses are not included in determining net income but
are accumulated in a separate component of stockholders' equity.
Foreign currency transaction gains and losses generally are
included in determining net income.
Inventories
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method.
Property and equipment
Property and equipment is stated at cost. Depreciation is
provided by the use of the straight-line method for financial
accounting purposes, while accelerated methods are used for income
tax purposes.
Recognition of revenues and expenses
Revenues from the sale of the Company's products are recognized at
the time of shipment. Related promotional allowances granted to
retailers are recognized at the time of sale. Certain trade and
consumer promotion costs included in selling, general and
administrative expenses in the consolidated statements of income
are accrued monthly.
18
19
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
Impairment Accounting
In fiscal 1995 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be
Disposed Of" ("FASB 121"). The adoption of FASB 121 had no
material impact on the impairment write-down of the Agree and
Halsa assets described herein.
Intangibles
Intangible assets consist primarily of goodwill, trademarks,
non-compete agreements and customer lists and are carried at cost
less accumulated amortization. The Company assesses the
recoverability of these intangible assets by determining whether
the amortization of the balance over their remaining life can be
recovered through undiscounted future operating cash flows of the
acquired assets. Costs are amortized over the estimated useful
lives of the related assets (5 - 40 years). Amortization expense
charged to operations for fiscal years ended July 31, 1995, 1994
and 1993 was $2,430,000, $2,669,000, and $1,275,000, respectively.
Since the acquisition of the Agree and Halsa product lines in
August 1993 from S.C. Johnson & Son, Inc., there has been a
significant decline in the sales volume and profit contribution of
such products. Accordingly in fiscal 1995, the Company revised
its future forecasts which resulted in a significant reduction in
projected future cash flows of the product lines. The Company
determined that its projected results for Agree and Halsa would
not support the future amortization of the remaining intangible
assets related to Agree and Halsa. As part of its analysis, the
Company engaged the services of an independent valuation
consultant to assist the Company in the determination of the fair
market value of the Agree and Halsa intangible assets. Based on
the results of the valuation, management concluded that the fair
value of the intangible assets of Agree and Halsa was
approximately $12,500,000, and wrote down the carrying value of
such intangibles in April 1995 by $24,718,000. (See "Note 15 of
the Notes to Consolidated Financial Statements.")
In 1993 the Company wrote-off the DietAyds and Bantron trademarks
and goodwill, which resulted in a charge against income of
$1,003,000. Bantron, the larger of the two, was discontinued due
to the action of the United States Food & Drug Administration in
1993 declaring that its active ingredient was ineffective and
accordingly, after December 1993, could no longer be sold in its
current form. DietAyds was discontinued in 1993 due to the
Company's inability to obtain future product manufactured at
economical terms.
19
20
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
Research and development costs
Research and development costs are charged to operations when
incurred. The amounts charged for years ended July 31, 1995, 1994
and 1993 were $750,000, $935,000, and $899,000, respectively.
Net income (loss) per share
Net income (loss) per share amounts are computed based on the
weighted average number of shares outstanding plus the shares that
would be outstanding assuming exercise of stock options, when
dilutive, which are considered common stock equivalents. The
number of shares that would be issued upon exercise of stock
options has been reduced by the number of shares that could have
been purchased from the proceeds using the average of the market
price of the Company's common stock.
Cash equivalents
Cash equivalents consist of highly liquid investments with a
maturity of three months or less when purchased.
Reclassifications
Certain reclassifications have been made to the 1994 and 1993
amounts to conform to the 1995 presentation.
NOTE 2. INVENTORIES:
The components of inventories were:
1995 1994
----------- -----------
Raw materials $ 4,233,000 $ 3,688,000
Finished goods 8,838,000 10,268,000
----------- -----------
$13,071,000 $13,956,000
=========== ===========
20
21
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
NOTE 3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
1995 1994
----------- -----------
Land $ 1,290,000 $ 1,290,000
Building and improvements 7,908,000 7,906,000
Machinery and equipment 13,558,000 13,775,000
Office furniture and equipment 7,091,000 6,612,000
Construction in process 88,000 118,000
Other 248,000 237,000
----------- -----------
30,183,000 29,938,000
Less accumulated depreciation 14,760,000 12,727,000
----------- -----------
$15,423,000 $17,211,000
=========== ===========
NOTE 4. INTANGIBLES:
Intangibles consisted of the following:
1995 1994
----------- -----------
Goodwill $23,365,000 $47,058,000
Trademarks 16,593,000 18,164,000
Other 5,067,000 5,314,000
----------- -----------
45,025,000 70,536,000
Less accumulated amortization 10,869,000 8,521,000
----------- -----------
$34,156,000 $62,015,000
=========== ===========
NOTE 5. ACCRUED EXPENSES:
Accrued expenses consisted of the following:
1995 1994
---------- ----------
Advertising and promotional expenses $3,377,000 $3,629,000
Compensation related 1,019,000 977,000
Freight 604,000 588,000
Other 2,920,000 2,525,000
---------- ----------
$7,920,000 $7,719,000
========== ==========
21
22
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
NOTE 6. LONG-TERM DEBT:
1995 1994
----------- -----------
Term loan $35,969,000 $39,778,000
Working capital advances 25,000,000 21,019,000
Mortgages, 9 1/4%, due in monthly
installments of $36,635 including interest
due through 2012, collateralized by first
trust deeds on land and building 3,780,000 3,867,000
Other 95,000 138,000
----------- -----------
64,844,000 64,802,000
Less current portion 61,100,000 3,828,000
----------- -----------
$ 3,744,000 $60,974,000
=========== ===========
The bank loans relate to the Revolving Credit and Term Loan Agreement,
as amended, (the "Bank Facility") that the Company entered into on
August 6, 1993, with a group of seven banks (the "Bank Group"), in
conjunction with the acquisition of the Agree and Halsa brands.
Pursuant to the terms of the Bank Facility in effect July 31, 1995,
the Term Loan was payable in quarterly installments through June 30,
1998, and the Working Capital Advances were repayable in full on August
6, 1998, the Bank Facility's termination date.
During 1995, borrowings under the Bank Facility were subject to
interest at the Agent bank's base rate (8 3/4% at July 31, 1995) plus
1 5/8% payable monthly.
The terms of the Bank Facility provide for the maintenance of
consolidated net worth and certain other financial covenants. Because
of the operating loss reported by the Company for the year ended July
31, 1995, the Company would not have been in compliance with such
covenants had the Bank Group not granted waivers of such technical
defaults extending through October 31, 1995.
On November 3, 1995, the Company and the Bank Group entered into a
Fifth Amendment to the Bank Facility effective as of October 30, 1995
(the "Fifth Amendment") which provides, among other things, for the
termination of the Bank Facility on December 30, 1996, a decrease in
working capital commitment to $25,000,000 from $28,000,000, an increase
in interest rates, and lower quarterly scheduled term loan payments
through April 1, 1996. The $9,567,000 payment originally due on
December 29, 1995, has been reduced to $500,000 and a principal payment
of $8,300,000 will now be due April 15, 1996. However, based on
current estimates of cash flow, management does not believe it will
have sufficient cash
22
23
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
to pay the $8,300,000 due on April 15, 1996. Accordingly, the entire
amount outstanding under the Bank Facility has been classified as a
current liability. The interest rate under the Fifth Amendment for
the period October 1, 1995 through June 30, 1996 will be base rate
plus 3%; July 1, 1996 through September 30, 1996, base rate plus 4%;
and thereafter base rate plus 5%. In addition, the financial
covenants have been revised with the first reporting period of January
31, 1995. (See "Note 16 of the Notes to Consolidated Financial
Statements.")
Substantially all of the Company's assets not otherwise pledged as
collateral on existing mortgages are pledged as collateral under the
Bank Facility. The terms of the Bank Facility limit the Company from
borrowing funds from sources other than the Bank Facility.
Interest expense charged to operations for fiscal years ended July 31,
1995, 1994 and 1993 was $6,255,000, $4,622,000, and $1,295,000,
respectively.
Maturities of long-term debt for years ended July 31, are as follows:
1996 $61,100,000
1997 145,000
1998 129,000
1999 123,000
2000 135,000
Thereafter 3,212,000
-----------
$64,844,000
===========
NOTE 7. INCOME TAXES:
The summary of the provision (credit) for federal and state income
taxes follows:
1995 1994 1993
----------- ------------ --------
Current
Federal $(1,807,000) $(2,027,000) $101,000
State 31,000 (67,000) 114,000
----------- ------------ --------
(1,776,000) (2,094,000) 215,000
------------ ----------- --------
Deferred
Federal (1,209,000) 406,000 185,000
State 120,000 (102,000) (1,000)
----------- ----------- ----------
(1,089,000) 304,000 184,000
------------ ----------- --------
Income taxes (credit) $(2,865,000) $(1,790,000) $399,000
============ ============ ========
23
24
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
The following is a reconciliation of the statutory U.S. federal income
tax rate to the effective tax rate based upon income (loss) before
income taxes (credit) as reported in the financial statements:
1995 1994 1993
------ ----- ------
U.S. federal statutory tax rate (35.0)% (35.0)% 34.0%
U.S. federal rate reduction 1.0 1.0 -
State taxes, net of federal
income tax benefit (4.5) (3.1) 4.7
Earnings of foreign sales
corporation not taxable (.5) (1.6) (6.2)
Intangibles amortization .7 4.1 36.6
Write-down of intangibles - - (43.3)
Increase in valuation
allowance 28.6 - -
Other .1 1.3 (0.4)
----- ----- -----
Effective tax rate (9.6)% (33.3)% 25.4%
===== ===== =====
The components of the deferred tax provision (credit) resulting from
temporary differences between the recognition of income for financial
and tax reporting purposes were as follows:
1995 1994 1993
----------- --------- ---------
Depreciation and amortization $(9,344,000) $ 786,000 $ 145,000
Valuation allowance 8,517,000 - -
California franchise tax 10,000 11,000 185,000
Charitable contributions (156,000) (130,000) (77,000)
Coupon redemption 127,000 (67,000) 46,000
Deferred charges 351,000 (102,000) (155,000)
Net operating loss, capital loss
and tax credit carryforwards (379,000) - -
Inventory valuation 113,000 (165,000) 29,000
Other (328,000) (29,000) 11,000
------------ --------- ---------
$(1,089,000) $ 304,000 $ 184,000
============ ========= =========
24
25
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
July 31, 1995 and 1994, are as follows:
1995 1994
----------- -----------
Deferred tax assets:
Accounts receivable $ 118,000 $ 108,000
Inventory 308,000 401,000
Intangibles 9,310,000 54,000
Contribution carryforwards 422,000 270,000
Net operating loss, capital loss and
tax credit carryforwards 823,000 -
Accrued liabilities 437,000 880,000
----------- -----------
Total gross deferred tax assets 11,418,000 1,713,000
Valuation allowance (8,517,000) -
----------- -----------
2,901,000 1,713,000
Deferred tax liabilities:
Property and equipment, net (2,447,000) (2,426,000)
----------- -----------
Net deferred tax asset (liability) $ 454,000 $ (713,000)
=========== ===========
The net operating loss, capital loss and tax credit carryforwards
expire between 1998 and 2010.
NOTE 8. INCENTIVE PLANS:
Stock option plans
The 1992 Stock Option Plan (the "1992 Plan") was adopted by the
Board of Directors in October 1992, and approved by the
stockholders in December 1992. The 1992 Plan, which expires in
October 2002, provides for the grant of options to purchase the
Company's common stock to officers, directors, consultants and
other key employees. The maximum number of shares issuable under
the 1992 Plan will be the lesser of ten percent (10%) of the total
number of shares of common stock outstanding at the date of grant
or 2,000,000 shares. The Company also has a 1983 Stock Option Plan
(the "1983 Plan"); however, no further options may be issued under
such plan.
25
26
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
As of July 31, 1995, there were 572,300 and 264,430 stock options
outstanding under the 1992 Plan and 1983 Plan, respectively. The
options outstanding entitle the holders to purchase 619,018 shares
of Class A Common Stock and 217,712 shares of Class B Common
Stock. Substantially all of the options outstanding are
exercisable in full three years after the date of grant.
A summary of activity in the Company's stock option plans is
presented below:
Shares Price
------- -------------
Outstanding at July 31, 1992 335,477 $2.75 - 12.38
Granted 271,100 4.00 - 9.90
Canceled or expired (8,731) 2.75 - 9.88
------- -------------
Outstanding at July 31, 1993 597,846 2.75 - 12.38
Granted 130,100 2.75 - 5.50
Exercised (8,275) 2.75
Canceled or expired (43,250) 2.75 - 9.88
------- -------------
Outstanding at July 31, 1994 676,421 2.75 - 12.38
Granted 233,500 1.13 - 2.23
Canceled or expired (73,191) 2.75 - 12.38
------- -------------
Outstanding at July 31, 1995 836,730 $2.75 - 12.38
======= =============
1995 1994
------- -------
Exercisable 249,430 200,471
======= =======
Available to be granted 52,190 268,540
======= =======
The options exercisable at July 31, 1995 and 1994 were exercisable
at price ranges per share of $2.75 to $12.38 and $2.75 to $9.88,
respectively.
Management incentive plans
In January 1988, the stockholders approved the 1988 Directors and
Officers Stock Option Plan which allows directors and officers to
elect to receive stock options in
26
27
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
lieu of compensation. Directors may elect to defer all of their
compensation whereas officers may defer a maximum of 15% of their
compensation. The number of shares subject to options has been
determined with reference to the fair market value of the
Company's common stock at least six months after date of election
to defer. At July 31, 1995 and 1994, there were outstanding
options to acquire 3,286 and 6,000 shares of common stock,
respectively.
In December 1993, stockholders approved the Stock Target Ownership
Plan (the "1993 Plan") under which the Company makes common stock
performance awards to certain employees in lieu of a percentage of
their cash bonuses and may provide other incentives to encourage
participants in the 1993 Plan to accumulate ownership of the
Company's common stock. The maximum number of shares issuable
under the 1993 Plan will be the lesser of ten percent (10%) of the
total number of shares of common stock outstanding at the date of
grant or 2,000,000 shares. The 1993 Plan expires October 27,
2003. At July 31, 1995 and 1994, three and four executives,
respectively, were entitled to receive an aggregate of 6,241 and
10,783 shares of Class B Common Stock under the 1993 Plan.
Deferred compensation plan
The Company provides its officers and directors with the
opportunity to participate in an unfunded, deferred compensation
program, which also provides for death and disability benefits.
At July 31, 1995 and 1994, there were four and six participants,
respectively, in the program. Under the program, participants may
defer up to 75% of their yearly total cash compensation. The
amounts deferred remain the sole property of the Company, which
uses them, together with additional corporate funds, to purchase
either insurance policies on the lives of the participants or
other investments. The insurance policies, which remain the sole
property of the Company, are payable to the Company upon the death
or permanent disability of the participant. The Company
separately contracts with the participant to pay stated benefits
substantially equivalent to those received or available under the
insurance policies or other investments upon the earlier of 10
years after date of first participation, retirement, death, or
permanent disability. The program is not qualified under Section
401 of the Internal Revenue Code. At July 31, 1995 and 1994, the
amounts payable under the plan approximated the value of the
assets owned by the Company.
27
28
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
NOTE 9. STOCKHOLDERS' EQUITY:
At the December 1992 annual meeting, stockholders approved a
reclassification whereby each share of the Company's outstanding
common stock was reclassified into one-half share of non-voting Class
A Common Stock and one-half share of voting Class B Common Stock.
Costs associated with the reclassification were charged against income
for the year ended July 31, 1993.
NOTE 10. RETIREMENT PLAN:
The Company maintains a profit sharing plan which covers employees who
are twenty and one-half years of age or older and have completed six
months of employment. The Company's Board of Directors approves the
amount of each year's contribution to such plan. The Company made no
contribution to the plan for the year ended July 31, 1995. The
Company's contributions for the years ended July 31, 1994 and 1993
were $100,000 and $135,000, respectively.
In June 1993, the Company's Board of Directors adopted a 401(k) plan
which became effective on August 1, 1993. The 401(k) plan covers
substantially all employees and gives them the option to make
contributions up to 15% of their annual compensation, subject to
certain statutory limitations, and permits the Company, in its
discretion, to match such contributions. The Company's contributions
for the years ended July 31, 1995 and 1994 were $53,000 and $61,000,
respectively.
NOTE 11. COMMITMENTS:
At July 31, 1995, future minimum lease payments that have noncancelable
lease terms in excess of one year were as follows:
Operating
Years ending July 31, Leases
--------------------- ----------
1996 $ 837,000
1997 783,000
1998 697,000
1999 677,000
2000 52,000
Thereafter 166,000
----------
Total minimum lease payments $3,212,000
==========
Rent expense for the years ended July 31, 1995, 1994 and 1993 was
$919,000, $880,000, and $875,000, respectively.
28
29
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
NOTE 12. RELATED-PARTY TRANSACTIONS:
Selling, general and administrative expenses for the years ended July
31, 1994 and 1993 included $476,000, and $357,000, respectively, paid
or accrued to a legal firm affiliated with an individual who served as
a director of the Company. For the year ended July 31, 1995, such
individual was no longer a member of the Board of Directors.
NOTE 13. REPORTING BY GEOGRAPHICAL AREAS OF THE BUSINESS:
The Company operates in two principal geographical areas: (l) U.S.,
excluding Puerto Rico, and (2) all other countries (including export
sales and royalties).
In computing income before taxes, certain administrative and general
expenses and other income and expense have been allocated to the
geographical areas based on their relative sales ratios, which varies
from year to year. Identifiable assets used jointly by the two areas
have also been allocated to the geographical areas based on relative
sales ratios.
The following is a summary of information by area:
1995 1994 1993
------------ ------------ ------------
Net Sales:
U.S. $108,016,000 $123,056,000 $117,853,000
Foreign 19,673,000 15,275,000 5,860,000
------------ ------------ ------------
Total $127,689,000 $138,331,000 $123,713,000
============ ============ ============
Income (loss) before
income taxes
(credit):
U.S. $(19,908,000) $(7,531,000) $ 485,000
Foreign (9,915,000) 2,158,000 1,084,000
------------ ----------- ----------
Total $(29,823,000) $(5,373,000) $1,569,000
============ =========== ==========
Identifiable assets:
U.S. $78,740,000 $ 97,417,000 $72,915,000
Foreign 15,164,000 24,678,000 5,714,000
----------- ------------ -----------
Total $93,904,000 $122,095,000 78,629,000
=========== ============ ===========
During 1995 and 1994, sales to Wal-Mart Stores, Inc. were 16% and 19%,
respectively, of consolidated net sales. No other customer accounted
for more than 10% of consolidated net sales for the periods presented.
29
30
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
NOTE 14. ACQUISITION:
On August 6, 1993, the Company acquired the Agree and Halsa shampoo
and conditioner trademarks for $45,000,000 in cash. As part of the
transaction the Company acquired certain related assets, primarily
inventories, machinery and equipment and a covenant not to compete.
At the time of the acquisition, the excess of the purchase price over
what the Company believed was the fair value of the assets acquired
(goodwill) was approximately $34,000,000. The acquisition was
accounted for as a purchase. (See "Note 1 - Intangibles of the Notes
to Consolidated Financial Statements.") The acquisition was financed
with borrowings from the Bank Facility. (See "Note 6 of the Notes to
Consolidated Financial Statements.")
NOTE 15. LEGAL:
On March 2, 1994, the Company filed a complaint against S.C. Johnson &
Son, Inc. ("S.C. Johnson") alleging, among other things, that, in
violation of its Purchase Agreement with the Company, S.C. Johnson
wrongfully altered its North American marketing and sales practices
prior to the closing of its sale of the Agree and Halsa trademarks and
certain related assets to the Company in August 1993. The complaint
was filed in the United States District Court in Los Angeles County
and seeks rescission of the transaction, monetary damages in an amount
to be determined, and other relief. The case is currently scheduled
to go to trial on February 23, 1996. In April 1994, S.C. Johnson and
a subsidiary filed related lawsuits in Wisconsin and Ontario, Canada,
respectively.
In the opinion of management there are no pending legal proceedings,
including the S.C. Johnson matter discussed above, which will have a
material adverse effect on the Company's financial position or results
of operations.
NOTE 16 LIQUIDITY:
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. As discussed
in "Note 6 of the Notes to Consolidated Financial Statements," the
Company and the Bank Group entered into the Fifth Amendment which
provides, among other things, for an $8,300,000 principal payment on
April 15, 1996. In light of the Company's current projected earnings
and cash flow, management believes the Company has the financial
resources to maintain its current level of operations until the April
15, 1996 principal payment is due. However, cash generated from
operations alone will not be sufficient to pay the $8,300,000 on April
15, 1996, without proceeds from the sale of assets or a refinancing
or restructuring of the Bank Facility prior to such date. As a
result, the Company has retained legal
30
31
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1995, 1994 AND 1993
counsel specializing in restructurings to render advice regarding
various alternatives available to the Company. In addition, the
Company has retained Donaldson, Lufkin & Jenrette Securities
Corporation to assist it in exploring strategic alternatives which
include, among other things, a business combination, sale of assets,
strategic investment in the Company or a refinancing of the Bank
Facility. There can be no assurance that the Company will be
successful in its attempt to consummate one of the strategic
alternatives or a refinancing of the Bank Facility.
If the Company does not make either the April 15, 1996 principal
payment or the balance due December 31, 1996, it may be unable to
continue its normal operations, except to the extent permitted by the
Bank Group. Substantially all of the Company's assets not otherwise
pledged as collateral on existing mortgages are pledged as collateral
under the Bank Facility. As of October 20, 1995, the Company has
cash and cash equivalents totalling approximately $5,300,000
(unaudited).
31
32
Dep Corporation and Subsidiaries
Notes to Consolidated FInancial Statements
Years ended July 31, 1995, 1994 and 1993
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant, in the capacities and on the dates indicated.
Date: November 6, 1995 DEP CORPORATION
/s/Robert Berglass
-----------------------------------
Robert Berglass
Chairman of the Board and President
(Principal Executive Officer)
Date: November 6, 1995 /s/Grant W. Johnson
-----------------------------------
Grant W. Johnson
Senior Vice President and
Chief Financial Officer and
Director, (Principal Financial
and Accounting Officer)
32
33
EXHIBIT INDEX
Sequential
Description Page Number
----------- -----------
Exhibit 10.21 Fifth Amendment, dated as of October 30, 1995, of the Revolving 34-48
Credit and Term Loan Agreement dated as of August 6, 1993
33