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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JULY 31, 1997
COMMISSION FILE NUMBER: 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:
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. Yes X
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No _
At October 8, 1997 the number of shares of Common Stock of the registrant
issued and outstanding were 6,876,140. At October 8, 1997 the aggregate market
value of Common Stock held by non-affiliates of the registrant was approximately
$9,166,066.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive proxy statement, which the
Registrant anticipates mailing in October 1997, are incorporated by reference in
Part III of the Report.
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PART I
ITEM 1. BUSINESS
GENERAL
DEP Corporation was reincorporated in Delaware in December 1987 after its
initial incorporation in California in 1956. Its executive offices are located
at 2101 East Via Arado, Rancho Dominguez, California and its telephone number is
(310) 604-0777.
DEP Corporation, together with its subsidiaries (collectively, the
"Company"), is engaged in developing, formulating, manufacturing, marketing and
distributing a wide range of trademarked personal care products. Trademarks of
the Company appear in this report in all capitalized letters. The following
table sets forth the principal brands of the Company:
L.A. LOOKS -- hair styling line
DEP -- hair styling line
THEORIE -- premium-priced, hair styling line
LILT -- home perms
AGREE -- shampoos & conditioners
HALSA -- shampoos & conditioners
NATURES FAMILY -- body and bath care line
PORCELANA -- skin fade cream
CUTICURA -- medicated, anti-bacterial soaps and powders
LE SYSTEME -- premium-priced, skin care line
TOPOL -- whitening toothpaste
LAVORIS -- mouthwash
Such products, together with the Company's other trademarked products, are
hereinafter collectively referred to as "Personal Care Products," which during
fiscal 1997 represented 95% of the Company's net sales. The Personal Care
Products are generally targeted toward distinct consumers and several of the
brands are among the market leaders in their respective categories. In the
United States, the Company is the leading marketer of hair styling gel and two
of its brands, L.A. LOOKS and DEP, are amongst the top ten hair styling lines.
Additionally, management believes its LILT and PORCELANA brands are the number
two brands in their respective niche categories.
The Personal Care Products are sold principally through mass merchandisers
(such as Wal-Mart and Kmart), food stores (such as Safeway and Smiths) and drug
stores (such as Rite-Aid and Walgreens). The Company's Personal Care Products
are also sold internationally, mostly through a network of distributors and
licensees, except that Canadian sales are conducted through a wholly-owned
subsidiary.
The Company's current strategy is to improve operating income by enhancing
sales and margins through internal brand development, cost containment programs
and efficient use of marketing resources. One of the Company's core strengths is
its ability to successfully develop and launch new trademarked products, such as
L.A. LOOKS. Building on this strength, late in fiscal 1997 the Company launched
two new, higher margin, product lines, LE SYSTEME and THEORIE. LE SYSTEME is a
premium priced, skin care line which offers the consumer the same high quality
formulations as well-known, department store skin care lines. THEORIE is a
premium priced, specialty hair care and styling line which offers the consumer
the same high quality formulations as well-known, professional salon products.
Both brands, LE SYSTEME, and THEORIE, will be sold at mass retail outlets.
The Company also engages in contract packaging and private label
activities, in which it manufactures a large variety of personal care products
for third parties. It is a highly competitive business and volume is subject to
fluctuation. These activities are hereinafter collectively referred to as
"Contract Packaging." Contract Packaging net sales, which increased 9% in fiscal
1997 over fiscal 1996, averaged 5% or less of consolidated net sales for the
Company's three most recent fiscal years. The Company intends to utilize its
excess production capacity for expansion of its Contract Packaging activities.
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On October 23, 1996, the Company's Second Amended Plan of Reorganization
(the "Plan of Reorganization") was confirmed by the United States Bankruptcy
Court for the District of Delaware (Case No. 96-480(HSB)) (the "Bankruptcy
Court") with an effective date of November 4, 1996 (the "Effective Date"). The
final decree closing the Company's chapter 11 case was entered on July 2, 1997.
None of the Company's foreign subsidiaries were part of the chapter 11 filing.
Among other things, the Plan of Reorganization provided that the Company
will repay approximately $62,000,000 in long-term secured indebtedness held by
the Company's senior lenders (the "Lender Group"), with interest at the prime
rate plus 2%, which indebtedness matures July 31, 2002. The Plan of
Reorganization further provided (i) for payment to the Lender Group of $150,000
in cash, on the Effective Date, to satisfy certain post-petition interest
claims; (ii) for the issuance to the Lender Group of 625,000 shares of Common
Stock; and (iii) for the satisfaction of unsecured creditor claims, plus 5%
interest, payable in monthly installments, commencing November 1996 and
continuing through March 15, 1998. Additionally, the Plan of Reorganization
required the Company to pledge to the Lender Group the net cash proceeds, as
defined, received by the Company in connection with the litigation between the
Company and S.C. Johnson & Son, Inc. and affiliates ("S.C. Johnson"). (See "Item
3 Legal Proceedings.")
The Company's operations continue to be affected by its August 1993
acquisition of AGREE and HALSA. The Company borrowed approximately $48 million
to acquire such brands and immediately thereafter sales significantly declined
and have continued to decline through July 31, 1997. As a result, the Company's
capital structure, including stockholders' equity, has been significantly,
negatively impacted. The Company continues to support the AGREE and HALSA brands
in an effort to stabilize their volume as such brands generate positive brand
contribution.
BUSINESS RESULTS
The following table sets forth the dollar volume and percentage of
consolidated net sales attributable to Personal Care Products and Contract
Packaging during the past three fiscal years:
YEARS ENDED JULY 31,
----------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
(DOLLARS IN THOUSANDS)
Personal Care Products:
Domestic.................................. $ 90,558 79% $ 95,182 80% $103,609 81%
International............................. 18,950 16 18,843 16 19,673 15
-------- --- -------- --- -------- ---
Total Personal Care Products(1)............. 109,508 95 114,025 96 123,282 96
Contract Packaging.......................... 5,526 5 5,063 4 4,407 4
-------- --- -------- --- -------- ---
Consolidated net sales...................... $115,034 100% $119,088 100% $127,689 100%
======== === ======== === ======== ===
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(1) For fiscal 1997, 1996 and 1995, the net sales of AGREE and HALSA declined by
$4.9 million, $4.5 million, and $8.7 million, respectively.
INTERNATIONAL
The Company's Personal Care Products are also marketed and sold
internationally in over 40 countries, including Canada, Japan, the United
Kingdom, Australia, Mexico, and China. General export sales and most of the
Personal Care Products sold in international markets are handled and
manufactured by the Company at its Rancho Dominguez facilities. The Company's
foreign operations are subject to risks inherent in transactions involving
foreign currencies and fluctuating exchange rates.
As of April 1997 the Company entered into a license arrangement with a
distributor in Australia. Accordingly, from April 1997 through July 31, 1997,
the Company recognized royalty income as a percentage of such distributor's net
sales. Prior to such time, the Company's products were sold in Australia through
an agent and the Company recognized the revenues and expenses from such sales.
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Effective February 1, 1996, the Company's Personal Care Products are sold
in Canada through a wholly-owned subsidiary and the Company recognizes the
revenues and expenses from such sales. Prior to February 1996, the DEP brand was
distributed by a licensee in Canada and the Company received royalty income as a
percentage of such licensee's net sales.
MARKETING
The Company markets most of its Personal Care Products as high quality
brands to value-conscious consumers. Its marketing strategies are defined on a
brand-by-brand basis to appeal to the particular consumers being targeted. As
part of this individualized, flexible approach, the Company works directly with
retailers in the United States and its network of international distributors to
implement promotional calendars tailored to the particular needs of each
retailer.
The Company schedules such promotions up to twelve months in advance. To
encourage retailer support for the Company's Personal Care Products, it utilizes
a variety of marketing techniques, including cooperative advertising, temporary
price reductions, promotional allowances, in-store displays, special promotional
events and free goods.
To encourage consumer trial and repeat sales at retail, the Company
utilizes various consumer marketing techniques. These include providing bonus
and trial sizes, coupons and packaging intended to heighten consumer recognition
and retail shelf presence. The Company also utilizes consumer media advertising,
principally print advertising, on selected brands of its Personal Care Products.
With the launch of THEORIE AND LE SYSTEME, the Company has expanded its
Personal Care Product lines to include the marketing of upscale products with
premium packaging and formulas. The margins on these brands will be higher than
the Company's current average.
The Company has created brand teams comprised of individuals who represent
a cross section of the Company's other departments, including research and
development, manufacturing, purchasing, planning, customer service and finance.
These brand teams work jointly on a product after its inception and are
responsible for the product's development, timely delivery, cost management and
growth. This structure is intended to enhance the Company's ability to meet the
consumer's need for high-quality products in an efficient, cost effective and
timely manner.
DISTRIBUTION AND CUSTOMERS
The Company's Personal Care Products are sold to mass merchandisers, food
stores, and drug stores resulting in the Company's Personal Care Products being
sold in more than 100,000 retail outlets in North America. The Company's sales
professionals directly manage the Company's key retail accounts and also are
responsible for overseeing the sales services of more than 40 independent broker
organizations which are paid on a commission basis. These independent broker
organizations assist the Company's sales professionals in selling the Personal
Care Products and carrying out trade promotions.
No customer other than Wal-Mart Stores, Inc. accounted for more than 10% of
the Company's total net sales in any of the last three years. During fiscal
years 1997, 1996 and 1995, Wal-Mart Stores, Inc. accounted for 17%, 17% and 16%,
respectively, of consolidated net sales. Although the Company believes it is
unlikely that it will lose all of such customer's business, the loss of such
customer's business could have a material adverse effect on the Company. None of
the Company's customers has any contractual obligation to make any purchase from
the Company.
Backlog orders for the Company's Personal Care Products are generally not
significant to its business, as the Company sells from its inventory and goods
are generally shipped promptly after receipt of orders. The Company typically
does not provide any extended payment terms to its retail customers.
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MANUFACTURING
During fiscal 1997, the Company's 180,000 sq. ft. facility in Rancho
Dominguez, California performed approximately 91% of the manufacturing and
packaging for Personal Care Products sold within the United States or exported,
with the remainder performed by contract manufacturers. (See "Item 2 Property.")
To monitor the quality of its products, the Company maintains a strict
internal quality control system supported by a modern, on-site analytical
chemistry and microbiology laboratory. Outside consultants are also employed
from time to time to monitor the effectiveness of the Company's manufacturing
operations. The Company maintains product liability insurance at levels which it
believes to be adequate.
Raw materials used by the Company are principally surfactants, fragrances,
chemicals and a wide variety of packaging materials and components such as
containers, closures, spray valves and labels, all of which are purchased from
outside sources. All principal raw materials and components used by the Company
to manufacture and package its Personal Care Products are generally available
from several domestic suppliers. Over the past five fiscal years, there has been
no substantial increase in the cost of such raw materials and components, taken
as a whole, and the Company does not anticipate any significant shortages of, or
difficulty in obtaining, such materials and components.
Industry practice permits retailers to return to manufacturers
non-defective merchandise which the retailers have been unable to sell. Over the
past five fiscal years, taken as a whole, the Company has experienced no
significant volume of returns of its products.
RESEARCH AND DEVELOPMENT
The Company engages in a continuous development program for new products
and improvements to its existing formulations for all of its Personal Care
Products. In addition to its Personal Care Products business, the Company
develops hundreds of personal care product formulas for its Contract Packaging
activities.
The Company's research and development staff works closely with the
Company's sales and marketing groups to keep current with changes in consumer
tastes and new product developments in the industry. The Company's on-site salon
permits the testing of new products and product improvements in conditions that
simulate those actually encountered by consumers. In management's view, the
Company's extensive research and development experience enhances its ability to
respond rapidly to market trends and introduce new products.
The Company's Scientific Advisory Board consists of industry experts in
dermatology, cosmetic science and oral health who assist the Company's research
and development staff with new product development concepts, as well as
assistance with governmental and regulatory matters. The Company also uses the
services of outside consultants, including privately funded research by major
universities, from time to time as it deems appropriate.
TRADEMARKS
The Company markets its products under a number of trademarks and trade
names that are registered in the United States and certain other countries. The
Company seeks to register its significant trademarks and names in foreign
countries when it enters them. The Company considers the L.A. LOOKS, DEP,
THEORIE, LILT, AGREE, HALSA, NATURES FAMILY, PORCELANA, CUTICURA, LE SYSTEME,
TOPOL, and LAVORIS trademarks among its most important assets. Formulas for
personal care products are typically not patentable.
COMPETITION
The market for personal care products is highly competitive and is
dominated by large multi-national corporations with greater financial and other
resources than the Company. These competitors include Procter & Gamble,
Unilever, L'Oreal, Colgate, and other multi-billion dollar corporations. The
Company competes with these other personal care product manufacturers with
respect to quality, packaging, marketing and price.
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Other factors affecting the personal care products industry are the
consolidation of retailers and increasingly competitive negotiations for access
to shelf space.
EMPLOYEES
At July 31, 1997, the Company employed approximately 300 full-time persons
in North America. The Company's employees are not covered by a collective
bargaining agreement. The Company has never experienced a work stoppage or
interruption due to a labor dispute and believes its labor relations to be good.
The Board of Directors recognizes that, as is the case with many publicly
held corporations, the possibility of a change in control of the Company may
exist and that such possibility, and the uncertainty and questions that it may
raise among management, could result in the distraction or departure of
management personnel to the detriment of the Company and its stockholders. The
Board has decided to reinforce and encourage the continued attention and
dedication of members of the Company's management to their assigned duties
without distraction arising from the possibility of a change in control by
adopting the DEP Corporation Retention and Severance Plan (the "RSP") for the
Company, effective August 15, 1995.
The RSP provides severance benefits and/or retention bonuses to employees
of the Company to encourage them to remain in the employ of the Company. The RSP
consists of a Layoff and Recall Policy for Plant Employees, a Layoff and Recall
Policy for Office Employees, a Change in Control Severance Policy for Non-Exempt
Employees and a Change in Control Severance Policy for Exempt Employees. The RSP
is intended to be and is administered as an employee welfare benefit plan under
the Employee Retirement Income Security Act of 1974, as amended.
All full-time employees of the Company are eligible to participate under
the change in control severance policies. As provided by the RSP, the Company
has entered into individual Change in Control Executive Severance agreements
with each of its executives and certain other key employees. Additionally, the
Company has entered into individual Change of Control Retention Bonus Agreements
with certain of its executives. These agreements were approved by the
independent, non-management members of the Company's Board of Directors.
GOVERNMENT REGULATION
The Company's manufacturing and packaging operations are subject to a wide
range of federal, state and local regulations. These regulations include the
applicable cosmetic purity and labeling requirements prescribed by the federal
Food, Drug and Cosmetic Act, the applicable labeling provisions of the federal
Fair Packaging and Labeling Act, the discharge, handling and disposal of
hazardous waste regulations contained in applicable environmental laws, and the
plant and laboratory safety requirements of various applicable occupational
safety and health laws. The Company is also subject to federal regulations
concerning the content of its advertising, trade practices and certain other
matters. Present government regulation does not materially restrict or impede
the Company's operations.
ITEM 2. PROPERTY
The Company owns its headquarters in Rancho Dominguez, California, near Los
Angeles, which consist of approximately 180,000 square feet of manufacturing,
warehousing, research laboratory, test salon and administrative areas. The
Company principally maintains its finished goods in approximately 145,000 square
feet of leased warehouse space in Rancho Dominguez, as well as in public
warehouses situated in Tennessee, New Jersey, and Toronto, Canada. (See "Note 4
of the Notes to Consolidated Financial Statements.")
ITEM 3. LEGAL PROCEEDINGS
On April 1, 1996 the Company filed a voluntary petition (the "Chapter 11
Case") under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (Case No. 96-480(HSB)) (the
"Bankruptcy Court") for the purpose of implementing the financial restructuring
of its business. The Company's Second Amended Plan of Reorganization (the "Plan
of
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Reorganization") was approved by all impaired classes of claims and interests
under the Plan of Reorganization and, on October 23, 1996, the Plan of
Reorganization was confirmed by the Bankruptcy Court. The Plan of Reorganization
became effective on November 4, 1996, and on July 2, 1997 the final decree
closing the Chapter 11 Case was entered. (See "Item 1 Business.")
On March 2, 1994, the Company filed a complaint in the United States
District Court for the Central District of California ("District Court") against
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 the sale of the AGREE AND
HALSA trademarks and related assets to the Company in August 1993.
On December 19, 1996, the Company and S.C. Johnson agreed to an
out-of-court settlement in regard to all pending litigation that arose in
connection with the Company's 1993 purchase of AGREE AND HALSA from S.C.
Johnson. The settlement involved the Company, its insurance carriers and S.C.
Johnson. Under the terms of such settlement the Company received net cash
proceeds from S.C. Johnson of $2,500,000, a $1,400,000 payment from the
Company's insurance carriers and forgiveness of approximately $1,400,000 owed to
S.C. Johnson for certain goods delivered following the AGREE AND HALSA
acquisition. The Company valued the total settlement, excluding related legal
costs, at $5,300,000. Under the Company's term loan agreement, $1,107,000 of the
settlement was paid to the Lender Group as a reduction of long-term debt.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the Company's executive officers as of July 31,
1997, based on data furnished by them, is set forth below:
NAME AGE POSITION
- ------------------- --- -----------------------------------------------------
Robert Berglass 59 Chairman of the Board; President; Director
Grant W. Johnson 53 Senior Vice President; Chief Financial Officer;
Director
Jerome P. Alpin 60 Senior Vice President and General Manager,
International Sales and Marketing
Judith R. Berglass 45 Senior Vice President, Corporate Secretary; Director
D. Lee Johnson 49 Vice President, Administration and Investor Relations
James W. Fink 58 Vice President, Operations
John G. Petersen 39 Vice President and Controller
Robert Berglass has served as President of the Company since 1969 and has
been Chairman of the Board of Directors since 1971. Immediately prior to joining
the Company, he was a Vice President of Faberge, Inc. He has more than 39 years
of experience in the personal care products industry.
Grant W. Johnson is the Senior Vice President, Finance and Chief Financial
Officer and has been employed by the Company since 1985 and as a director since
1986. For approximately eight years preceding his joining the Company, he was
Vice President, Finance of Vidal Sassoon, Inc. Mr. Johnson, a certified public
accountant, also has seven years of experience with Deloitte & Touche LLP.
Jerome P. Alpin is the Senior Vice President and General Manager of
International Sales and Marketing and has been employed by the Company since
1982. From June 1982 through July 1993 he served as the Company's Senior Vice
President, Sales and Marketing. He has more than 30 years of experience in sales
and marketing of personal care products, including positions with Bristol-Meyers
Co., Faberge, Inc., and Revlon, Inc., prior to joining the Company.
Judith R. Berglass is a Senior Vice President and has been employed by the
Company since 1983. She has served as its Vice President, Corporate Development
since 1984, a director since 1985 and since 1986 has
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also served as Secretary. For the three years prior to joining the Company, she
was Vice President of CLF Associates, a management consulting firm. She is the
wife of the President.
D. Lee Johnson is the Vice President of Administration and Investor
Relations and has been employed by the Company since October 1994. Prior thereto
he was with Gibson, Dunn & Crutcher for four years where his last capacity was
Chief Financial Officer. Mr. Johnson, a certified public accountant, also has 18
years with The Dial Corporation, where he last served as Vice President Planning
and Development.
James W. Fink is the Vice President of Operations and has been employed by
the Company since 1990. From November 1995 through January 1997 he served as
Vice President of Material Management and was Director of Materials prior to
that. Prior to joining the Company in 1990, he was a consultant to the industry
and held domestic and international senior management and executive positions at
Revell, Inc. He has more than 25 years of materials management and operations
experience in the personal care products industry.
John G. Petersen is the Vice President and Controller and has been employed
by the Company since 1990. For approximately seven years preceding his joining
the Company, he held various managerial positions and last served as Corporate
Controller of L.H. Research, Inc. Mr. Petersen is a certified public accountant
with three years experience with Deloitte & Touche LLP.
All officers serve at the discretion of the Board of Directors.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Since November 4, 1996, the Company's Common Stock has traded on the Nasdaq
SmallCap Market tier of the Nasdaq Stock Market under the symbol "DEPC." On
November 4, 1996, the Effective Date of the Plan of Reorganization (See "Item 1
Business"), the Company's Class A and Class B common stock was reclassified into
a single class of Common Stock. Prior to November 2, 1995, the Company's Class A
and Class B common stock traded on the Nasdaq National Market.
The following table sets forth the high and low closing sale prices, as
reported by Nasdaq, of the Company's Common Stock:
1997 1996
-------------- --------------
HIGH LOW HIGH LOW
---- --- ---- ---
CLASS A
First Quarter..................................... 2 3/8 1 1/4 2 5/8 1 7/16
Second Quarter.................................... N/A N/A 1 9/16 1
Third Quarter..................................... N/A N/A 1 7/8 9/16
Fourth Quarter.................................... N/A N/A 2 1/4 7/8
CLASS B
First Quarter..................................... 2 3/8 1 1/4 2 5/8 1 1/2
Second Quarter.................................... N/A N/A 2 1/8 1
Third Quarter..................................... N/A N/A 1 15/16 1/2
Fourth Quarter.................................... N/A N/A 2 11/16
COMMON STOCK
First Quarter..................................... N/A N/A N/A N/A
Second Quarter.................................... 2 3/4 1 5/8 N/A N/A
Third Quarter..................................... 2 1 1/8 N/A N/A
Fourth Quarter.................................... 1 15/16 1 1/4 N/A N/A
The closing sales price of Common Stock on October 8, 1997 was $2 per
share. On October 8, 1997, there were a total of 167 record holders of Common
Stock and more than 300 beneficial holders whose shares are held of record by
nominees.
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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 cash for the operation and expansion of the
Company's business. In addition, the Company's term loan agreement 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 7 of the
Notes to Consolidated Financial Statements.")
In November 1996, 625,000 shares of the Company's Common Stock were issued
to the Company's Lender Group pursuant to the Company's Amended Plan of
Reorganization.
On March 1, 1997, U.S. Stock Transfer & Trust Company became the Company's
Registrar and Transfer Agent.
On August 25, 1997, the Nasdaq Stock Market announced revised requirements
for the continued listing of securities on the Nasdaq SmallCap Market. The
Company's Common Stock trades on the SmallCap Market and currently meets six of
the seven requirements for continued listing of its securities. However, the
Company does not currently meet the revised requirement to have one of the
following: (i) a minimum of $2 million of net tangible assets, (ii) a market
capitalization of its Common Stock of at least $35 million, or (iii) net income
of at least $500,000. The Company does not meet the net tangible assets
requirement due to the goodwill incurred as a result of acquisitions. Incurring
significant goodwill is typical in acquisitions within the consumer products
industry, and such goodwill is excluded from Nasdaq's net tangible asset
calculation. On October 8, 1997, the Company's market capitalization was
$13,752,280 and, therefore, does not currently meet the capitalization
requirement. Finally, the Company does not currently meet the net income
requirement because of its recent losses.
The revised listing requirements become effective February 23, 1998. If the
Company cannot meet the one remaining listing requirement, it may request a
hearing to determine whether an exemption will be granted. No assurance can be
given that the Company would be successful in obtaining an exemption from the
listing requirements. The Company expects that if it does not obtain such
exemption, its shares will be suspended or terminated from trading on the
SmallCap Market and moved to the OTC Bulletin Board until it can, once again,
meet the listing requirements. While the Company does not currently meet the net
income portion of such requirement, it was profitable in the fourth quarter of
the fiscal year ended July 31, 1997 and anticipates that it will earn sufficient
net income in order to meet the continued listing requirement for the fiscal
year ending July 31, 1998.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEARS ENDED JULY 31,
----------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA
Net sales................................... $115,034 $119,088 $127,689 $138,331 $123,713
Gross profit................................ 70,164 74,066 80,194 87,646 78,666
Selling, general and administrative
expenses.................................. 63,760 70,986 78,728 88,525 74,388
Income (loss) from operations before
write-downs............................... 6,404 3,080 1,466 (879) 4,278
Write-down in assets........................ -- -- 25,166 -- 1,003
Income (loss) from operations............... 6,404 3,080 (23,700) (879) 3,275
Other expense, primarily interest........... 6,822 7,143 6,123 4,494 1,706
Reorganization items(1)..................... 20 3,895 -- -- --
Income (loss) before income taxes
(credits)................................. (438) (7,958) (29,823) (5,373) 1,569
Net income (loss)........................... (438) (7,958) (26,958) (3,583) 1,170
Net income (loss) per share................. $ (.07) $ (1.27) $ (4.32) $ (.57) $ .18
JULY 31,
-------------------------------------------------
1997 1996 1995 1994 1993
------- ------- -------- -------- -------
BALANCE SHEET DATA
Working capital (deficiency)................... $25,780 $29,288 $(35,682) $ 20,416 $23,587
Total assets................................... 84,690 89,838 93,904 122,095 78,629
Long-term debt, net of current portion(2)...... 61,521 3,597 3,744 60,974 19,557
Stockholders' equity........................... 4,101 3,282 11,227 38,155 41,640
Shares outstanding............................. 6,876 6,251 6,245 6,231 6,223
- ---------------
(1) Net reorganization expenses incurred as a result of the Chapter 11 Case.
(2) At July 31, 1996 and 1995 debt under its credit agreements was classified
within liabilities subject to compromise and current portion of long-term
debt, respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
Fiscal 1997 Compared to Fiscal 1996
Consolidated net sales for 1997 were $115,034,000 compared to $119,088,000
in 1996. The decrease related to lower unit volume of the Company's Personal
Care Products which accounted for 95% and 96% of the consolidated net sales for
1997 and 1996, respectively.
Net sales of Personal Care Products decreased 4%, primarily as a result of
continued lower worldwide sales of its AGREE and HALSA brands. In 1997,
aggregate net sales of AGREE and HALSA declined by 22% from the prior year to
$17,500,000. Personal Care Products net sales, excluding AGREE and HALSA,
increased slightly in 1997, compared to 1996, primarily due to a 9% increase in
the combined worldwide sales of L.A. LOOKS and DEP, partially offset by a
decrease in unit volume of the Company's other brands. Contract Packaging
increased 9% due to the Company's continuing efforts to utilize excess
manufacturing capacity.
Domestic net sales of Personal Care Products decreased 5%, primarily due to
the decline in sales of the AGREE, HALSA, and NATURES FAMILY brands. In 1997,
AGREE and HALSA domestic sales decreased 20% compared to the 1996 level.
9
11
International net sales of Personal Care Products increased 1% principally
due to higher Canadian sales, partially offset by a 25% decrease in sales of
AGREE and HALSA. Effective February 1996, the Company began selling its DEP
brand in Canada through its wholly-owned subsidiary and, as a result, the
Company recognized a full year of revenues and expenses from such sales in
fiscal 1997. Prior to February 1996, the DEP brand was distributed by a licensee
in Canada and the Company received royalty income as a percentage of such
licensee's net sales.
Gross profits for 1997 were $70,164,000, or 61% of net sales, compared to
$74,066,000, or 62% of net sales, in the prior year. In dollar terms, the
decrease was the result of lower sales volume, while the decrease as a
percentage of net sales was primarily due to lower sales of AGREE and a higher
proportion of international and Contract Packaging sales. International and
Contract Packaging sales generate lower gross margins as a percentage of net
sales and incur lower selling expenses compared to the Company's other domestic
Personal Care Products.
Selling, general and administrative expenses ("SG&A") for 1997 decreased to
$63,760,000, or 55% of net sales, as compared to $70,986,000, or 60% of net
sales, in 1996. The decrease in SG&A as a percentage of net sales was primarily
the result of a reduction in coupon programs and lower administrative expenses
due to the Company's 1996 cost reduction program and lower amortization expense.
In dollar terms, SG&A decreased primarily due to the aforementioned items, as
well as lower variable expenses related to the decline in net sales. Fiscal 1997
SG&A also included a $250,000 net charge related to a recall of a test market
skin care line.
Amortization expense was lower in 1997 compared to 1996 due to the
settlement of the S.C. Johnson litigation, wherein $3,900,000 of such proceeds
offset intangible carrying value. Amortization expense in 1996 included
amortization of deferred debt issuance costs which were fully amortized within
such year.
Operating income in 1997 increased by $3,324,000 to $6,404,000, or 5.6% of
net sales, up from $3,080,000, or 2.6% of net sales in 1996. Such improvement
was the result of lower SG&A expense partially offset by lower gross profits.
Net interest expense decreased to $6,813,000 in 1997 from $7,120,000 in
1996 due to a lower average interest rate on borrowings and increased interest
income generated by higher cash balances throughout 1997.
Reorganization items related to the Chapter 11 Case amounted to $20,000 in
1997 compared to $3,895,000 in 1996. The lower expense in 1997 related to the
Company's emergence from Chapter 11 bankruptcy in November 1996.
Since the Company incurred a loss and has previously utilized all of its
income tax carryback benefits, there was no tax provision in either 1997 or
1996.
In 1997, the Company reported a net loss of $438,000, or $.07 per share,
compared to a net loss of $7,958,000, or $1.27 per share, in fiscal 1996. Fiscal
1997 results were positively impacted by lower SG&A and interest expense as
compared to 1996. Fiscal 1996 results included a $3,895,000, or $.62 per share,
charge for reorganization items.
Fiscal 1996 Compared to Fiscal 1995
Consolidated net sales for 1996 were $119,088,000 compared to $127,689,000
in 1995. Personal Care Products net sales accounted for 96% of the consolidated
net sales for 1996 and 1995.
Net sales of Personal Care Products decreased 8%, primarily as a result of
continued lower worldwide sales of AGREE and HALSA. From the date of the AGREE
and HALSA acquisition through July 31, 1996, annual worldwide net sales of AGREE
and HALSA have declined more than $40,000,000. Such decline was largely
responsible for the deterioration in the Company's financial condition that led
to the Company's filing of its Chapter 11 Case on April 1, 1996. Contract
Packaging net sales increased 15% due to increased efforts to utilize excess
manufacturing capacity.
10
12
Domestic net sales of Personal Care Products decreased 8%, primarily as a
result of the continued decline of AGREE and HALSA sales. In 1996, net sales of
AGREE and HALSA decreased approximately 16%. In addition, domestic Personal Care
Products sales were adversely affected by a 1995 L.A. LOOKS promotion which was
not repeated in 1996, and lower domestic sales of the Company's other products.
International net sales of Personal Care Products decreased 4% principally
due to lower sales of AGREE in Australia and lower sales in China. The decrease
was offset, in part, by higher Canadian sales. Prior to February 1996, the DEP
brand was distributed by a licensee in Canada and the Company received royalty
payments based upon a percentage of such licensee's net sales. Effective
February 1, 1996, the Company began selling its DEP brand in Canada through its
wholly-owned subsidiary and, as a result, the Company recognized the revenues
and expenses from such sales.
Gross profits for 1996 were $74,066,000, or 62% of net sales, compared to
$80,194,000, or 63% of net sales, in the prior year. The decrease in dollar
terms was the result of lower sales volume, while the decrease as a percentage
of net sales was due to a higher proportion of international and Contract
Packaging sales.
SG&A for 1996 decreased to $70,986,000, or 60% of net sales, as compared to
$78,728,000, or 62% of net sales, in 1995. The decrease in SG&A as a percentage
of net sales was primarily the result of the Company's 1996 cost reduction
program initiated in January 1996 and the full year's effect of the 1995 cost
reduction program initiated in February 1995. The dollar decrease in SG&A
relates to the aforementioned cost reduction program and lower variable expenses
due to the decline in net sales.
Operating income (before reorganization items and the write-down of AGREE
and HALSA assets) rose to $3,080,000 as compared to $1,466,000 in 1995. Such
improvement was the result of lower SG&A expense.
Net interest expense increased to $7,120,000 in 1996 from $6,177,000 in
1995 as a result of higher interest rates and a higher average principal
balance. The Company's long-term debt increased due to the addition of deferred
interest pursuant to the Chapter 11 Case.
Reorganization items related to the Chapter 11 Case totaled $3,895,000
which included $2,638,000 of professional fees (of which $1,150,000 related to
the Lender Group's professional fees) and $1,372,000 for the write-off of
deferred debt issuance costs incurred under the previous bank facility,
partially offset by $115,000 of interest income earned from the deferral of
pre-petition liabilities.
Since the Company incurred a loss and has previously utilized all of its
income tax carryback benefits, there was no tax provision in 1996.
In 1996, the Company reported a net loss of $7,958,000, or $1.27 per share,
compared to a net loss of $26,958,000, or $4.32 per share, in the prior year.
Comparatively, the 1995 loss was the result of the after tax writedown in value
of AGREE and HALSA assets of $24,072,000 and higher SG&A expense, partially
offset by reorganization items of $3,895,000 and higher interest expense
incurred in 1996. The reorganization items in 1996 reduced earnings by $.62 per
share while the write-down in 1995 reduced earnings by $3.85 per share.
LIQUIDITY AND CAPITAL RESOURCES
At July 31, 1997, the Company had cash and cash equivalents of $11,788,000.
The cash balance at July 31, 1997 was favorably impacted by the deferral of
approximately $2,900,000 in pre-petition liabilities owed to unsecured creditors
and $1 million related to deferred interest. Under the Plan of Reorganization
pre-petition unsecured creditor claims are payable, together with 5% interest,
in equal monthly installments through March 15, 1998, and the deferred interest
due the Lender Group through the Effective Date was added to the Credit
Facility's principal balance. Cash balances in 1997 were also favorably impacted
by approximately $1.7 million of net proceeds received (after expenses and
principal paid to the Lender Group) from the out-of-court settlement of
litigation between the Company and S.C. Johnson.
Changes in working capital during 1997 were significantly impacted by the
reclassification of the Chapter 11 Case's "liabilities subject to compromise"
used in the July 31, 1996 balance sheet compared to the typical classification
of liabilities at July 31, 1997. The Company emerged from bankruptcy effective
November 4, 1996; and therefore, liabilities are no longer classified under the
"liabilities subject to
11
13
compromise" format. For the twelve month period ended July 31, 1997 working
capital was impacted by an increase in inventory and a decrease in accrued
expenses and accounts payable. The increase in inventory was the result of
preparing for the launch of two new product lines in July 1997. The decrease in
accrued expenses was primarily the result of the reduction of legal expenses
relating to the settlement of the Chapter 11 Case and the S.C. Johnson
litigation. The decrease in accounts payable, adjusted for the effect of the
reclassification of "liabilities subject to compromise," was due to the paydown
of pre-petition unsecured creditor claims and the forgiveness of approximately
$1,400,000 of indebtedness relating to the settlement of the S.C. Johnson
litigation. The decrease in accounts payable was partially offset by the benefit
of returning to pre-chapter 11 trade credit terms with an increased number of
suppliers.
Management believes that its cash and cash equivalents and cash flows from
operations will be sufficient to enable it to meet its obligations for the next
twelve months.
The Company has from time to time engaged in discussions with third parties
regarding the possible acquisition by one or more of such third parties of
discrete portions of the Company's assets, and it has received indications of
interest from time to time from third parties interested in acquiring all of the
Company's stock or assets. The discussions have been preliminary in nature and
no agreements regarding any such sale or sales have been reached, nor can any
assurance be given that any agreements will be reached.
FORWARD LOOKING STATEMENTS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations, the Chairman's Letter and other sections of this Annual Report
contain forward looking statements that are based on management's current
beliefs and assumptions about expectations, estimates, strategies and
projections for the Company. Words such as "expects," "seeks," "anticipates,"
"intends," "plans," "believes," "estimates," and variations of such words and
similar expressions are intended to identify such forward looking statements.
These statements are not guarantees of future performance and involve risks,
uncertainties and assumptions that are difficult to predict. Therefore, actual
outcomes and results may differ materially from what is expressed or forecasted
in such forward looking statements. The Company undertakes no obligation to
update publicly any forward looking statements whether as a result of new
information, future events or otherwise.
The risks, uncertainties and assumptions regarding forward looking
statements include, but are not limited to, product demand and market acceptance
risks; product development risks, such as delays or difficulties in developing,
producing and marketing new products or line extensions; the impact of
competitive products, pricing and advertising; constraints resulting from the
financial condition of the Company, including the degree to which the Company is
leveraged, debt service requirements and restrictions under bank loan
agreements; and other risks described in the Company's Securities and Exchange
Commission filings.
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 128, "Earnings
per Share," SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131,
"Disclosure about Segments of an Enterprise and Related Information." SFAS No.
128 changes the computation, presentation and disclosure requirements for
earnings per share. (See "Note 2 of the Notes to Consolidated Financial
Statements.") SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components. SFAS No. 131 supersedes previous
reporting requirements for reporting on segments of a business enterprise. These
accounting standards are effective for periods beginning after December 15,
1997. The Company has not determined the impact, if any, of these new accounting
standards.
12
14
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, 1997 and 1996
Consolidated Statements of Operations for Years Ended July 31, 1997, 1996
and 1995
Consolidated Statements of Stockholders' Equity for Years Ended July 31,
1997, 1996 and 1995
Consolidated Statements of Cash Flows for Years Ended July 31, 1997, 1996
and 1995
Notes to Consolidated Financial Statements
SCHEDULES
Schedule I is not provided because it is not required
Schedule II -- Valuation and Qualifying Accounts and Reserves
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning directors called for by this item is
incorporated by reference in the Company's 1997 Proxy Statement which is to be
filed with the Securities and Exchange Commission pursuant to Regulation 14A
within 120 days of the end of the fiscal year covered by this report.
Information concerning executive officers called for by this item appears in
Part I of this report. The information concerning late filings under Section
16(a) of the Securities and Exchange Act of 1934, as amended, is incorporated by
reference from the 1997 Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Items 11, 12 and 13 is incorporated by
reference in the Company's 1997 Proxy Statement which is to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A within 120 days of
the end of the fiscal year covered by this report.
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.
13
15
3. Exhibits
EXHIBIT SEQUENTIAL
NUMBER TITLE PAGE NUMBER
------ -------------------------------------------------------------------- -----------
2.1 Debtor's Second Amended Plan of Reorganization, dated as of August
23, 1996, as amended, pursuant to Chapter 11 filing on April 1,
1996(8).............................................................
3.1 Certificate of Incorporation(1).....................................
3.2 Certificate of Amendment to the Certificate of Incorporation(2).....
3.3 Certificate of Amendment to the Certificate of Incorporation(6).....
3.4 Certificate of Amendment to the Certificate of Incorporation(8).....
3.5 Bylaws, as amended, and restated August 27, 1997....................
10.1 Form of DEP Corporation Financial Benefit Plan as of September 1,
1997*...............................................................
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(4)*..........................................
10.5 Stock Target Ownership Plan(5)*.....................................
10.6 Form of Fiscal Year 1997 Bonus Arrangement for Certain Executive
Officers*...........................................................
10.7 Lease Agreement relating to the Company's California warehouse(3)...
10.8 Form of Fiscal Year 1998 Bonus Arrangement for Certain Executive
Officers*...........................................................
10.9 Form of Officers and Directors Indemnification Agreement(6).........
10.10 DEP Corporation Retention and Severance Plan(7)*....................
10.11 Form of Change in Control Executive Severance Agreement(7)*.........
10.12 Form of Change in Control Executive Retention Bonus Agreement(7)*...
10.13 Term Loan Agreement, dated as of November 4, 1996, among the Company
as borrower, City National Bank, as co-agent and Foothill Capital
Corporation as agent, and others(8).................................
10.14 Release Agreement dated as of November 4, 1996 by and among the
Company and the Lenders named therein(8)............................
10.15 Performance Bonus Plan for the President and Chief Executive
Officer*............................................................
11 Computation of Earnings Per Share...................................
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 and 10.7 to the Company's
Annual Report on Form 10-K for the year ended July 31, 1992.
(4) Incorporated by reference to Exhibit 10.4 to the Company's Annual Report on
Form 10-K for the year ended July 31, 1993.
(5) Incorporated by reference to Exhibit 10.5 to the Company's Annual Report on
Form 10-K for the year ended July 31, 1994.
14
16
(6) Incorporated by reference to Exhibits 3.4 and 10.16 to the Company's Current
Report on Form 8-K filed on January 16, 1995.
(7) Incorporated by reference to Exhibits 10.18, 10.19 and 10.20 to the
Company's original Annual Report on Form 10-K and Form 10-K/A for the year
ended July 31, 1995 filed on October 30, 1995, and November 6, 1995,
respectively.
(8) Incorporated by reference to Exhibits 2.1, 3.1, 10.1 and 10.3 to the
Company's Current Report on Form 8-K filed on November 7, 1996.
(9) Incorporated by reference to Exhibit 21.1 to the Company's Annual Report on
Form 10-K for the year ended July 31, 1996.
* Management contract or compensatory plan.
(B) REPORTS ON FORM 8-K.
None.
15
17
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the years in the three-year period ended July 31, 1997. 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, 1997 and 1996, and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 31, 1997, in conformity with generally accepted accounting
principles. Also in our opinion, the related financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
/s/ KPMG Peat Marwick LLP
Los Angeles, California
September 12, 1997
16
18
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31,
---------------------------
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and cash equivalents....................................... $11,788,000 $11,118,000
Accounts receivable, less allowance for doubtful accounts of
$341,000 in 1997 and $387,000 in 1996........................ 16,218,000 15,750,000
Inventories..................................................... 12,996,000 11,999,000
Other current assets............................................ 2,014,000 3,339,000
----------- -----------
Total current assets.................................... 43,016,000 42,206,000
Property and equipment, net....................................... 12,822,000 14,086,000
Intangibles, net.................................................. 27,181,000 32,651,000
Other assets...................................................... 1,671,000 895,000
----------- -----------
$84,690,000 $89,838,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Liabilities not subject to compromise:
Current portion of long-term debt............................... $ 1,853,000 $ 144,000
Accrued expenses................................................ 6,854,000 9,563,000
Accounts payable................................................ 8,529,000 3,211,000
----------- -----------
Total current liabilities............................... 17,236,000 12,918,000
Liabilities subject to compromise................................. -- 67,783,000
Long-term debt, net of current portion............................ 61,521,000 3,597,000
Other non-current liabilities..................................... 1,832,000 2,258,000
----------- -----------
Total liabilities....................................... 80,589,000 86,556,000
Commitments and contingencies (Notes 12 and 15)
Stockholders' equity:
Preferred stock, par value $.01; authorized 3,000,000 shares;
none outstanding............................................. -- --
Class A common stock, par value $.01; issued 3,232,559 at July
31, 1996..................................................... -- 32,000
Class B common stock, par value $.01; issued 3,249,581 at July
31, 1996..................................................... -- 32,000
Common Stock, par value $.01; authorized 15,000,000 shares;
issued 7,107,140 at July 31, 1997............................ 71,000 --
Additional paid-in capital...................................... 13,397,000 12,141,000
Retained deficit................................................ (8,181,000) (7,743,000)
Foreign currency translation adjustment......................... (181,000) (175,000)
----------- -----------
5,106,000 4,287,000
Less: treasury stock, at cost, 231,000 shares of Common Stock at
July 31, 1997 and 115,500 shares each of Class A and Class B
common stock at July 31, 1996................................ (1,005,000) (1,005,000)
----------- -----------
Total stockholders' equity.............................. 4,101,000 3,282,000
----------- -----------
$84,690,000 $89,838,000
=========== ===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
17
19
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31,
----------------------------------------------
1997 1996 1995
------------ ------------ ------------
Net sales...................................... $115,034,000 $119,088,000 $127,689,000
Cost of sales.................................. 44,870,000 45,022,000 47,495,000
------------ ------------ ------------
Gross profit................................... 70,164,000 74,066,000 80,194,000
Selling, general and administrative expenses... 63,760,000 70,986,000 78,728,000
Write-down in value of assets.................. -- -- 25,166,000
------------ ------------ ------------
Income (loss) from operations.................. 6,404,000 3,080,000 (23,700,000)
Other expenses (income):
Interest expense, net........................ 6,813,000 7,120,000 6,177,000
Other........................................ 9,000 23,000 (54,000)
------------ ------------ ------------
6,822,000 7,143,000 6,123,000
------------ ------------ ------------
Loss before reorganization items and income tax
credits...................................... (418,000) (4,063,000) (29,823,000)
Reorganization items........................... 20,000 3,895,000 --
------------ ------------ ------------
Loss before income tax credits................. (438,000) (7,958,000) (29,823,000)
Income tax credits............................. -- -- (2,865,000)
------------ ------------ ------------
Net loss....................................... $ (438,000) $ (7,958,000) $(26,958,000)
============ ============ ============
Net loss per share............................. $ (.07) $ (1.27) $ (4.32)
============ ============ ============
Weighted average shares outstanding............ 6,701,916 6,250,368 6,244,106
============ ============ ============
The accompanying notes are an integral part of the Consolidated Financial
Statements.
18
20
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1997, 1996 AND 1995
FOREIGN
CLASS A CLASS B ADDITIONAL RETAINED CURRENCY
COMMON COMMON COMMON PAID-IN EARNINGS/ TRANSLATION TREASURY STOCK,
STOCK STOCK STOCK CAPITAL (DEFICIT) ADJUSTMENT AT COST
-------- -------- ------- ----------- ------------ ---------- ---------------
Balance at July 31, 1994...... $ 32,000 $ 32,000 $ -- $12,137,000 $ 27,173,000 $(214,000) $(1,005,000)
Adjustment to stock
issuance.................... (11,000)
Net loss for the year......... (26,958,000)
Cumulative translation
adjustment.................. 41,000
-------- -------- ------- ----------- ----------- --------- -----------
Balance at July 31, 1995...... 32,000 32,000 -- 12,126,000 215,000 (173,000) (1,005,000)
Issuance of stock............. 15,000
Net loss for the year......... (7,958,000)
Cumulative translation
adjustment.................. (2,000)
-------- -------- ------- ----------- ----------- --------- -----------
Balance at July 31, 1996...... 32,000 32,000 -- 12,141,000 (7,743,000) (175,000) (1,005,000)
Issuance of stock............. 7,000 1,256,000
Reclassification.............. (32,000) (32,000) 64,000
Net loss for the year......... (438,000)
Cumulative translation
adjustment.................. (6,000)
-------- -------- ------- ----------- ----------- --------- -----------
Balance at July 31, 1997...... $ -- $ -- $71,000 $13,397,000 $ (8,181,000) $(181,000) $(1,005,000)
======== ======== ======= =========== =========== ========= ===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
19
21
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JULY 31,
--------------------------------------------
1997 1996 1995
----------- ----------- ------------
Operating activities:
Net loss..................................................... $ (438,000) $(7,958,000) $(26,958,000)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.............................. 3,181,000 5,933,000 5,507,000
Write-down in value of assets.............................. -- -- 25,166,000
Provision for losses on accounts receivable................ 160,000 195,000 504,000
Deferred income taxes...................................... -- (70,000) (1,783,000)
Other...................................................... 71,000 9,000 90,000
Changes in operating assets and liabilities:
Accounts receivable........................................ (832,000) 2,867,000 (2,540,000)
Inventories................................................ (1,364,000) 1,072,000 894,000
Income taxes receivable.................................... -- 1,779,000 1,401,000
Other assets............................................... 1,063,000 (1,064,000) 1,331,000
Accrued expenses........................................... (617,000) 630,000 701,000
Accounts payable........................................... (2,304,000) 3,532,000 370,000
----------- ----------- -----------
Net cash provided by (used in) operating activities.......... (1,080,000) 6,925,000 4,683,000
----------- ----------- -----------
Investing activities:
Purchases of property and equipment........................ (722,000) (378,000) (716,000)
Acquisition of trademarks.................................. -- -- (200,000)
Proceeds from sale of trademarks........................... -- -- 435,000
Proceeds from litigation settlement........................ 3,900,000 -- --
Other...................................................... 13,000 (27,000) (112,000)
----------- ----------- -----------
Net cash provided by (used in) investing activities.......... 3,191,000 (405,000) (593,000)
----------- ----------- -----------
Financing activities:
Proceeds (reductions) from lines of credit and long-term
debt..................................................... (1,444,000) (26,000) 42,000
Other...................................................... -- 15,000 (487,000)
----------- ----------- -----------
Net cash used in financing activities........................ (1,444,000) (11,000) (445,000)
----------- ----------- -----------
Increase in cash and cash equivalents........................ 667,000 6,509,000 3,645,000
Effect of exchange rate changes on cash...................... 3,000 (2,000) 19,000
Cash and cash equivalents at beginning of year............... 11,118,000 4,611,000 947,000
----------- ----------- -----------
Cash and cash equivalents at end of year..................... $11,788,000 $11,118,000 $ 4,611,000
=========== =========== ===========
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest, net.............................................. $ 5,299,000 $ 4,816,000 $ 6,357,000
=========== =========== ===========
Income tax payments (refunds).............................. $ 6,000 $(1,960,000) $ (2,546,000)
=========== =========== ===========
The accompanying notes are an integral part of the Consolidated Financial
Statements.
20
22
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1997, 1996 AND 1995
NOTE 1. REORGANIZATION
On April 1, 1996 (the "Filing Date") the Company filed a voluntary petition
(the "Chapter 11 Case") under chapter 11 of the United States Bankruptcy Code.
From the Filing Date until the Effective Date (as defined below), the Company
operated its business as a debtor-in-possession subject to the jurisdiction of
the Bankruptcy Court. During such time, all claims against the Company in
existence prior to the Filing Date through the Effective Date were stayed and
were classified as "liabilities subject to compromise" in the consolidated
balance sheet.
At July 31, 1996 "liabilities subject to compromise" were comprised of the
following:
Secured liabilities payable to Lender Group..................... $57,792,000
Accrued interest payable to Lender Group........................ 2,210,000
Accounts payable to unsecured creditors......................... 7,719,000
Other accrued liabilities....................................... 62,000
-----------
$67,783,000
===========
On October 23, 1996, the Company's Second Amended Plan of Reorganization
(the "Plan of Reorganization") was confirmed by the United States Bankruptcy
Court for the District of Delaware (Case No. 96-480(HSB)) (the "Bankruptcy
Court") with an effective date of November 4, 1996 (the "Effective Date"). On
July 2, 1997, the final decree closing the Chapter 11 Case was entered. None of
the Company's foreign subsidiaries were part of the chapter 11 filing.
At July 31, 1997, no amounts were subject to compromise as the Company
emerged from chapter 11.
Among other things, the Plan of Reorganization on the Effective Date
provided that the Company will repay approximately $62,000,000 in long-term
secured indebtedness held by the Company's senior lenders (the "Lender Group"),
with interest at the prime rate plus 2%, which indebtedness matures July 31,
2002. The Plan of Reorganization further provided (i) for payment to the Lender
Group of $150,000 in cash, on the Effective Date, to satisfy certain
post-petition interest for claims; (ii) for the issuance to the Lender Group of
625,000 shares of Common Stock; and (iii) for the satisfaction of unsecured
creditor claims, plus 5% interest, payable in monthly installments, commencing
November 1996 and continuing through March 15, 1998. Additionally, the Plan of
Reorganization required the Company to pledge to the Lender Group the net cash
proceeds, as defined, received by the Company in connection with the litigation
between the Company and S.C. Johnson & Son, Inc. and affiliates ("S.C.
Johnson"). (See "Note 15 of the Notes to Consolidated Financial Statements.")
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company
The Company develops, formulates, manufactures, markets and distributes a
wide range of trademarked Personal Care Products. The Company's Personal Care
Products are primarily sold by mass merchandisers, food stores and drug stores
in the United States and internationally in over 40 countries.
Principles of consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany balances and
transactions have been eliminated.
21
23
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
Foreign currency translation
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the United States dollar are translated
at year-end exchange rates and income statement amounts are translated at
average exchange rates prevailing during the year. 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
operations are accrued monthly.
Intangible assets
Costs of acquisitions in excess of net tangible assets acquired are stated
at cost less accumulated amortization and 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, 1997, 1996 and 1995 was $1,148,000,
$1,510,000, and $2,430,000, respectively.
Since the acquisition of the AGREE and HALSA product lines in August 1993
from S.C. Johnson, there has been a significant decline in the sales volume and
profit contribution of such products. Accordingly, in 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. 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. Furthermore, in 1997 the Company adjusted the
carrying values by an additional $3,900,000 as a result of the settlement of the
S.C. Johnson litigation. (See "Note 15 of the Notes to Consolidated Financial
Statements.")
The Company continually reviews its intangibles to assess recoverability
from future operations using undiscounted operating cash flows. Impairments
would be recognized in operating results if permanent diminution in value
occurred.
22
24
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
Research and development costs
Research and development costs relate primarily to the development of new
products and improvements to existing formulations and are expensed when
incurred. The expenses were $794,000, $661,000, and $750,000 for years ended
July 31, 1997, 1996 and 1995, respectively.
Net loss per share
Net 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 could be issued upon exercise of stock
options are reduced by the number of shares that could be purchased from the
proceeds using the average of the market price of the Company's Common Stock.
For the three year periods ended July 31, 1997 there were no dilutive stock
options.
In February 1997, Statements of Financial Accounting Standards (SFAS) No.
128 -- "Earnings per Share" was issued and is effective for the interim and
annual reporting periods ending after December 15, 1997. SFAS No. 128 will
require the presentation of Basic Earnings per Share and Diluted Earnings per
Share in the Company's Consolidated Statement of Operations. Basic Earnings per
Share represents income available to common stockholders divided by the weighted
average number of common shares outstanding for the period. Diluted Earnings per
Share is similar to the current calculation of fully diluted earnings per share.
SFAS No. 128 requires restatement of all prior period earnings per share data
presented, however, management believes the adoption of SFAS No. 128 will not
have an impact on the Company's financial position or results of operations.
Cash equivalents
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased.
Fair value of financial instruments
The carrying amounts of cash and cash equivalents, accounts receivable,
other assets, accounts payable and accrued expenses approximate fair market
value due to the short maturity of these items.
Management estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses and the amount of any contingent assets or liabilities disclosed in
the financial statements. Actual results could differ from the estimates made.
Reclassifications
Certain reclassifications have been made to the 1996 and 1995 amounts to
conform to the 1997 presentation.
23
25
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
NOTE 3. INVENTORIES
The components of inventories were:
1997 1996
----------- -----------
Raw materials..................................... $ 5,470,000 $ 4,650,000
Finished goods.................................... 7,526,000 7,349,000
----------- -----------
$12,996,000 $11,999,000
=========== ===========
NOTE 4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
1997 1996
----------- -----------
Land.............................................. $ 1,290,000 $ 1,290,000
Building and improvements......................... 7,911,000 7,911,000
Machinery and equipment........................... 13,807,000 13,696,000
Office furniture and equipment.................... 7,326,000 7,199,000
Construction in process........................... 39,000 157,000
Other............................................. 125,000 258,000
----------- -----------
30,498,000 30,511,000
Less accumulated depreciation..................... 17,676,000 16,425,000
----------- -----------
$12,822,000 $14,086,000
=========== ===========
NOTE 5. INTANGIBLES
Intangibles consisted of the following:
1997 1996
----------- -----------
Goodwill.......................................... $21,394,000 $23,365,000
Trademarks........................................ 13,548,000 16,595,000
Other............................................. 2,892,000 5,069,000
----------- -----------
37,834,000 45,029,000
Less accumulated amortization..................... 10,653,000 12,378,000
----------- -----------
$27,181,000 $32,651,000
=========== ===========
The Company adjusted the carrying value of certain goodwill and trademarks
in connection with its settlement of the S.C. Johnson litigation. (See "Note 15
of the Notes to Consolidated Financial Statements.")
24
26
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
NOTE 6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
1997 1996
---------- ----------
Advertising and promotional expenses................ $3,324,000 $3,928,000
Compensation related................................ 952,000 1,002,000
Freight............................................. 517,000 716,000
Professional fees................................... 124,000 1,987,000
Other............................................... 1,937,000 1,930,000
---------- ----------
$6,854,000 $9,563,000
========== ==========
NOTE 7. LONG-TERM DEBT
1997 1996
----------- ----------
Term loan.......................................... $59,772,000 $ --
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......................................... 3,586,000 3,684,000
Other.............................................. 16,000 57,000
----------- ----------
63,374,000 3,741,000
Less current portion............................... 1,853,000 144,000
----------- ----------
$61,521,000 $3,597,000
=========== ==========
The pre-petition principal and all of the deferred and unpaid interest owed
to the Lender Group at July 31, 1996 was classified as "liabilities subject to
compromise." At July 31, 1997, amounts owed the Lender Group were included in
long-term debt as the Company has emerged from chapter 11. (See "Note 1 of the
Notes to Consolidated Financial Statements.")
The Term Loan relates to a Term Loan Agreement that the Company entered
into on November 4, 1996 with the Lender Group in conjunction with the Plan of
Reorganization. The Term Loan provides that the Company will pay monthly
interest on outstanding balances at the prime rate plus two percent per annum,
maturing July 31, 2002. The Term Loan requires increasing quarterly principal
payments commencing in the amount of $100,000 on the Effective Date and
progressively increasing to $2,000,000 at June 30, 2002, with a balloon payment
of approximately $37,000,000 due July 31, 2002. Under the Term Loan the Company
is also obligated to pay the Lender Group an additional $81,250 per month for a
period of 12 months after the Effective Date, in satisfaction of the Lender
Group's professional fees and expenses incurred during the Chapter 11 Case. At
July 31, 1997 and 1996, the liability for such professional fees was classified
within the current portion of long-term debt and accrued expenses, respectively.
The Term Loan also contains various financial covenant requirements, including
minimum current and fixed charge coverage ratios, maximum capital expenditures
and leverage ratios. At July 31, 1997, the Company was in compliance with these
covenants. Substantially all of the Company's assets not pledged as collateral
on existing mortgages are pledged as collateral under the Term Loan.
In connection with the Term Loan Agreement, the Company issued 625,000
shares of its Common Stock for no cash consideration. The Company recorded these
shares at estimated fair value on the Effective Date and will amortize the
amount over the term of the loan as interest expense.
Interest expense, net of interest income, charged to operations for fiscal
years ended July 31, 1997, 1996 and 1995 was $6,813,000, $7,120,000, and
$6,177,000, respectively.
25
27
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
Maturities of long-term debt for years ended July 31, are as follows:
1998...................................................... $ 1,853,000
1999...................................................... 3,623,000
2000...................................................... 5,385,000
2001...................................................... 6,898,000
2002...................................................... 42,711,000
Thereafter................................................ 2,904,000
-----------
$63,374,000
===========
NOTE 8. REORGANIZATION ITEMS
Reorganization items consisted of the following:
1997 1996
--------- ----------
Professional fees.............................. $ 150,000 $1,488,000
Professional fees payable to Lender Group...... -- 1,150,000
Write-off of deferred debt issuance costs
related to Bank Facility..................... -- 1,372,000
Interest income................................ (130,000) (115,000)
--------- ---------
$ 20,000 $3,895,000
========= =========
NOTE 9. INCOME TAXES
The summary of the income tax provision (credits) for federal and state
income taxes follows:
1997 1996 1995
----------- ----------- -----------
Current:
Federal........................... $ -- $ -- $(1,807,000)
State............................. -- -- 31,000
----------- ----------- -----------
-- -- (1,776,000)
Deferred:
Federal........................... -- -- (1,209,000)
State............................. -- -- 120,000
----------- ----------- -----------
-- -- (1,089,000)
----------- ----------- -----------
Income taxes (credits).............. $ -- $ -- $(2,865,000)
=========== =========== ===========
26
28
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
The following is a reconciliation of the statutory United States federal
income tax rate to the effective tax rate based upon loss before income tax
credits as reported in the consolidated financial statements:
1997 1996 1995
----- ----- -----
United States federal statutory tax rate............ (35.0)% (35.0)% (35.0)%
United States federal rate reduction................ 1.0 1.0 1.0
State taxes, net of federal income tax benefit...... 5.9 (2.0) (4.5)
Earnings of foreign sales corporation not taxable... -- -- (.5)
Intangibles amortization............................ 49.4 2.7 .7
Increase in valuation allowance..................... (32.3) 37.4 28.6
Other, net.......................................... 11.0 (4.1) .1
----- ----- -----
Effective tax rate.................................. --% --% (9.6)%
===== ===== =====
The components of the deferred tax provision (credits) resulting from
temporary differences between the recognition of income for financial and tax
reporting purposes were as follows:
1997 1996 1995
--------- ----------- -----------
Depreciation and amortization...... $ 906,000 $ 614,000 $(9,344,000)
Valuation allowance................ (228,000) 2,941,000 8,517,000
Charitable contributions........... (41,000) (47,000) (156,000)
Coupon redemption.................. 270,000 (113,000) 127,000
Deferred charges................... 142,000 (81,000) 351,000
Net operating loss, capital loss
and tax credit carryforwards..... (957,000) (3,006,000) (379,000)
Inventory valuation................ 28,000 115,000 113,000
Other, net......................... (120,000) (423,000) (318,000)
--------- ----------- -----------
$ -- $ -- $(1,089,000)
========= =========== ===========
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at July 31,
1997 and 1996, were as follows:
1997 1996
------------ ------------
Deferred tax assets:
Accounts receivable........................... $ 122,000 $ 89,000
Inventory..................................... 309,000 236,000
Intangibles................................... 8,790,000 8,810,000
Contribution carryforwards.................... 434,000 468,000
Net operating loss, capital loss and tax
credit carryforwards........................ 4,146,000 3,819,000
Accrued liabilities........................... (1,000) 353,000
----------- -----------
Total gross deferred tax assets............... 13,800,000 13,775,000
Valuation allowance........................... (11,230,000) (11,458,000)
----------- -----------
2,570,000 2,317,000
Deferred tax liabilities:
Property and equipment, net................... (2,570,000) (2,317,000)
----------- -----------
Net deferred tax assets....................... $ -- $ --
=========== ===========
The Company had Federal net operating loss and tax credit carryforwards of
$8.8 million and $600,000, respectively, which expire between 1999 and 2012.
27
29
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
NOTE 10. 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's 1983
Stock Option Plan (the "1983 Plan") has expired and no further options may be
issued under such plan.
As of July 31, 1997, there were 566,450 and 40,000 stock options
outstanding under the 1992 Plan and 1983 Plan, respectively. 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, 1994.................... 676,421 $2.75 - 12.38
Granted at fair value........................... 233,500 1.13 - 2.23
Canceled or expired............................. (73,191) 2.75 - 12.38
-------- -------------
Outstanding at July 31, 1995.................... 836,730 $1.13 - 12.38
Granted at fair value........................... 10,000 2.13
Canceled or expired............................. (340,580) 1.13 - 9.88
-------- -------------
Outstanding at July 31, 1996.................... 506,150 $1.13 - 12.38
Granted at fair value........................... 174,000 1.31 - 1.63
Cancelled or expired............................ (73,700) 1.12 - 12.38
-------- -------------
Outstanding at July 31, 1997.................... 606,450 $1.13 - 9.90
======== =============
1997 1996
-------- -------------
Exercisable..................................... 382,853 263,850
======== =============
Available to be granted......................... 121,164 173,964
======== =============
At July 31, 1997 and 1996 the exercisable options were priced at ranges of
$1.63 to $9.90 and $2.23 to $12.38 per share, respectively.
Stock-based compensation disclosure
Effective August 1, 1996, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation."
As permitted by the standard, the Company has elected to continue following the
guidance of Accounting Principles Board (APB) Opinion 25, "Accounting for Stock
Issued to Employees," for measurement and recognition of stock-based
transactions with employees. Accordingly, no compensation cost has been
recognized for the Company's option plans. If compensation costs for the
Company's stock option plans had been determined based on the fair value at the
grant date consistent with SFAS No. 123, the Company's net loss and net loss per
share for 1997 would have been $496,000 and $.07, compared to $438,000 and $.07,
respectively. There would have been no impact on fiscal 1996 results.
28
30
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
The estimated weighted average fair value of options granted during 1997
was $1.46 per share as determined using the Black-Scholes valuation model
assuming an expected average risk-free interest rate of 5.5%, an expected life
of 4 years, and an expected weighted average volatility of .73%.
Management incentive plans
In January 1988, the stockholders approved the 1988 Directors and Officers
Stock Option Plan (the "1988 Plan") which allows directors and officers to elect
to receive stock options in 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 is determined with
reference to the fair market value of the Company's Common Stock at least six
months after date of election to defer. The 1988 Plan expires January 1998. For
the fiscal years ended July 31, 1997 and 1996 there were no outstanding options
under the 1988 Plan.
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 to accumulate ownership of
the Company's Common Stock. The maximum number of shares issuable under the 1993
Plan is 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 2003. For the fiscal years ended July 31, 1997 and 1996 no
shares of Common Stock were issued under the 1993 Plan.
NOTE 11. RETIREMENT PLANS
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 determines the amount of each
year's contribution, if any, to such plan. The Company made no contribution to
the plan for the years ended July 31, 1997, 1996 and 1995.
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 employees the option to make contributions up to 15% of
their annual compensation, subject to certain statutory limitations, and permits
the Board, in its discretion, to determine the amount of any matching
contributions by the Company. The Company's contributions for the years ended
July 31, 1997, 1996, and 1995 were $55,000, $50,000, and $53,000, respectively.
In June 1997, the Company's Board of Directors approved the merger of the
profit sharing plan with the 401(k) plan effective September 1, 1997.
29
31
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
NOTE 12. COMMITMENTS
At July 31, 1997, future minimum lease payments that have noncancelable
lease terms in excess of one year were as follows:
CAPITAL OPERATING
LEASES LEASES
------- ----------
Years ending July 31,
1998.................................................. $43,000 $ 720,000
1999.................................................. 43,000 691,000
2000.................................................. -- 69,000
2001.................................................. -- 69,000
2002.................................................. -- 37,000
Thereafter............................................ -- --
------- ----------
Total minimum payments...................... $86,000 $1,586,000
======= ==========
Rent expense for the years ended July 31, 1997, 1996 and 1995 was $983,000,
$945,000, and $919,000, respectively.
NOTE 13. RELATED-PARTY TRANSACTIONS
There were no related party transactions for the years ended July 31, 1997,
1996 and 1995.
NOTE 14. REPORTING BY GEOGRAPHICAL AREAS OF THE BUSINESS
The Company operates in two principal geographical areas: (l) United
States, excluding Puerto Rico, and (2) all other countries (including export
sales and royalties).
In computing income (loss) 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:
1997 1996
------------ ------------
Net sales:
United States................................. $ 96,084,000 $100,245,000
Foreign....................................... 18,950,000 18,843,000
------------ ------------
Total................................. $115,034,000 $119,088,000
============ ============
Income (loss) before income tax credits:
United States................................. $ (516,000) $ (6,984,000)
Foreign....................................... 78,000 (974,000)
------------ ------------
Total................................. $ (438,000) $ (7,958,000)
============ ============
Identifiable assets:
United States................................. $ 74,619,000 $ 74,642,000
Foreign....................................... 10,071,000 15,196,000
------------ ------------
Total................................. $ 84,690,000 $ 89,838,000
============ ============
30
32
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JULY 31, 1997, 1996 AND 1995
During 1997, 1996 and 1995, sales to Wal-Mart Stores, Inc. were 17%, 17%
and 16%, respectively, of consolidated net sales. No other customer accounted
for more than 10% of consolidated net sales for the periods presented.
NOTE 15. LEGAL
On April 1, 1996 the Company filed a voluntary petition (the "Chapter 11
Case") under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (Case No. 96-480(HSB)) (the
"Bankruptcy Court") for the purpose of implementing the financial restructuring
of its business. The Company's Second Amended Plan of Reorganization (the "Plan
of Reorganization") was approved by all impaired classes of claims and interests
under the Plan of Reorganization and, on October 23, 1996, the Plan of
Reorganization was confirmed by the Bankruptcy Court. The Plan of Reorganization
became effective on November 4, 1996, and on July 2, 1997, the final decree
closing the Chapter 11 Case was entered. (See "Note 1 of the Notes to
Consolidated Financial Statements.")
On March 2, 1994, the Company filed a complaint in the United States
District Court for the Central District of California ("District Court") against
S.C. Johnson & Son, Inc. and affiliates ("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 the sale of the AGREE and HALSA trademarks and related
assets to the Company in August 1993.
On December 19, 1996, the Company and S.C. Johnson agreed to an
out-of-court settlement in regard to all pending litigation that arose in
connection with the Company's 1993 purchase of AGREE and HALSA from S.C.
Johnson. The settlement involved the Company, its insurance carriers and S.C.
Johnson. Under the terms of such settlement the Company received net cash
proceeds from S.C. Johnson of $2,500,000, a $1,400,000 payment from the
Company's insurance carriers which was applied to certain 1997 related legal
costs, and forgiveness of approximately $1,400,000 owed to S.C. Johnson for
certain goods delivered following the AGREE and HALSA acquisition. The Company
valued the total settlement at $5,300,000. Under the Company's term loan
agreement, $1,107,000 of the net cash proceeds of the settlement, as defined,
were paid to the Lender Group as a reduction of long-term debt.
31
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DEP CORPORATION
By: /s/ ROBERT BERGLASS
------------------------------------
Robert Berglass, President
October 24, 1997
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.
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------ -----------------
/s/ ROBERT BERGLASS Chairman of the Board and October 24, 1997
- --------------------------------------------- President (Principal Executive
Robert Berglass Officer)
/s/ GRANT W. JOHNSON Senior Vice President and October 24, 1997
- --------------------------------------------- Chief Financial Officer and
Grant W. Johnson Director (Principal Financial
and Accounting Officer)
/s/ JUDITH R. BERGLASS Senior Vice President and October 24, 1997
- --------------------------------------------- Corporate Secretary and
Judith R. Berglass Director
/s/ ALEXANDER L. KYMAN Director October 24, 1997
- ---------------------------------------------
Alexander L. Kyman
/s/ MICHAEL LEINER Director October 24, 1997
- ---------------------------------------------
Michael Leiner
/s/ PHILIP I. WILBER Director October 24, 1997
- ---------------------------------------------
Philip I. Wilber
32
34
DEP CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
COLUMN C
ADDITIONS
-----------------------------
COLUMN B (1) (2)
BALANCE AT CHARGED TO CHARGED TO COLUMN D COLUMN E
COLUMN A BEGINNING OF COSTS AND OTHER ACCOUNTS-- DEDUCTIONS -- BALANCE AT
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
- ----------------------------- ------------ ---------- ---------------- ------------ --------------
Year End July 31, 1997
Allowance for doubtful
accounts................ $ 387,000 $ 160,000 $ 0 $ (206,000)* $ 341,000
Allowance for customer
chargebacks............. 1,626,000 (68,000)** 0 0 1,558,000
Inventory valuation........ 959,000 293,000 0 (346,000)*** 906,000
Year end July 31, 1996
Allowance for doubtful
accounts................ 478,000 92,000 0 (183,000)* 387,000
Allowance for customer
chargebacks............. 1,985,000 (359,000)** 0 0 1,626,000
Inventory valuation........ 931,000 250,000 0 (222,000)*** 959,000
Year end July 31, 1995
Allowance for doubtful
accounts................ 262,000 504,000 0 (288,000)* 478,000
Allowance for customer
chargebacks............. 1,765,000 220,000** 0 0 1,985,000
Inventory valuation........ 1,222,000 596,000 0 (887,000)*** 931,000
- ---------------
* Amounts written off, net of recoveries.
** Net activity.
*** Amounts written off against reserve.
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