1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
TO
1996 ANNUAL REPORT ON FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
July 31, 1996 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___Yes X No
______----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
At November 5, 1996 the aggregate market value of Common Stock held by
non-affiliates of the registrant was approximately $10,716,302.
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___X No
______----- -----
At November 5, 1996 the number of shares of Common Stock of the registrant
issued and outstanding were 6,793,628.
Index to Exhibits appears on page 35.
17.
PART I
ITEM 1 BUSINESS
Dep Corporation together with2
The undersigned registrant hereby amends item 14 of its subsidiaries (collectively,Annual Report
on Form 10-K for the "Company"), is a personal care products company engaged in developing,
manufacturing, and marketing a wide range of trademarked hair, skin and oral
care products. Hair care includes L.A. Looks and Dep hair styling products,
Lilt home perm products and Agree and Halsa shampoos and conditioners. Skin
care includes Natures Family, Cuticura and Porcelana specialty skin care
products. Topol toothpaste and Lavoris mouthwash comprise oral care. Such
products, together with the Company's other trademarked products, are
hereinafter collectively referred to as the "Consumer Products."
The Company also is engaged in the contract packaging and private label
businesses, in which it manufactures a large variety of hair, skin and oral care
products for sale by retailers, distributors and manufacturers under their own
trademarks. Such products are hereinafter collectively referred to as "Contract
Packaging."
The Consumer Products are generally targeted toward specialty markets and
several of them are among the brand leaders in such markets. The Consumer
Products are sold principally through food, drug and mass merchandise stores.
REORGANIZATION
On October 23, 1996, the United States Bankruptcy Court confirmed the
Second Amended Plan of Reorganization (the "Plan of Reorganization") of the
Company, and on November 4, 1996 (the "Effective Date"), the Plan of
Reorganization became effective. The Company originally filed its voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") on April 1, 1996 (the "Filing Date"). The filing was made in
the United States Bankruptcy Court, District of Delaware (the "Bankruptcy
Court"). The Company amended its Plan of Reorganization on August 23,year ended July 31, 1996, to reflect the agreements it had reached with its secured lenders (the "Lender
Group"). On September 9, 1996, the Bankruptcy Court approved the Disclosure
Statement relating to the Plan of Reorganization, thereby enabling the Company
to solicit votes on the Plan of Reorganization from the Lender Group, other
creditors and stockholders. From the Filing Date until the Effective Date, the
Company operated its business as a debtor in possession subject to the
jurisdictionaddition of the
Bankruptcy Court. During such time, all claims against the
Company in existence priorauditors' consent to the Filing Date were stayed and have been
classified as "liabilities subject to compromise"incorporation by reference in the consolidated balance
sheet. (See "Note 1registration statement
(No. 33-58894) on Form S-8 of the Notes to Consolidated Financial Statements.")
The PlanDEP Corporation and subsidiaries of Reorganization provides for the treatmenttheir report
dated September 20, 1996. In connection therewith, a revised exhibit No. 23.1
(Consent of allowed claims
against and equity interests in the Company, pursuant to a series of
classifications summarized herein.
Class 1 under the Plan of Reorganization comprises all claims of the Lender
Group, which amount to approximately $62,000,000. Pursuant to the Plan of
Reorganization, theseIndependent Auditors) is attached hereto.
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claims will be repaid, with interest at the prime rate plus 2%, pursuant to a
restructured long term note, the maturity of which is July 31, 2002. With
respect to Class 1, the Plan of Reorganization further provides that on the
Effective Date, the Lender Group would receive $150,000 in cash to satisfy
certain post-petition interest claims, 542,488 shares of the Company's Common
Stock, and warrants to purchase an additional 330,050 shares of Common Stock
at a price equal to the average of the last reported sales price for the
Company's Common Stock on each of the 20 consecutive trading days following
the Effective Date. Under the Plan of Reorganization, the Company's formerly
outstanding Class A and Class B common stock have been reclassified as one
class of Common Stock having the same voting rights, preferences and
privileges. Finally, the Plan of Reorganization provides for the Company to
pledge to the Lender Group any net cash proceeds derived by the Company in
connection with the pending litigation between the Company and S.C. Johnson &
Son, Inc. ("S.C. Johnson") and affiliates, described below. (See "Item 3
Legal Proceedings.")
Class 2 under the Plan of Reorganization comprises all claims of Nationwide
Life Insurance Company ("Nationwide") and West Coast Life Insurance Company
("West Coast"), which claims are secured by the Company's real property in
Rancho Dominguez, California. These claims arise under certain promissory notes
and deeds of trust entered into between the Company and Nationwide and West
Coast, respectively, the principal amount of which is approximately $3,700,000
in the aggregate. Pursuant to the Plan of Reorganization, any default under
those instruments has been cured, the Company has compensated Nationwide and
West Coast for any actual damages incurred in reliance upon those instruments,
the maturity dates thereof have been reinstated, and the rights of Nationwide
and West Coast thereunder otherwise have not been altered.
Class 3 under the Plan of Reorganization comprises all unsecured claims
that are specified as having priority under Bankruptcy Code sections 507(a)(3),
507(a)(4), 507(a)(5), or 507(a)(6), respectively. Pursuant to the Plan of
Reorganization, any and all such claims are to be paid on the later of the
Effective Date and the date such claims would be due in the ordinary course of
business.
Class 4 under the Plan of Reorganization comprises unsecured claims of
$1,000 or less, or which the holder voluntarily has reduced its claim to $1,000.
Pursuant to the Plan of Reorganization, the holders of these claims are entitled
to cash equal to the amount of their allowed claims on or about the Effective
Date.
Class 5 under the Plan of Reorganization comprises any and all unsecured
claims of the Company's subsidiaries. Pursuant to the Plan of Reorganization,
such claims shall continue to receive treatment in accordance with the Company's
ordinary business practices.
Class 6 under the Plan of Reorganization comprises unsecured claims that
are not classified in any other class of claims. These include claims arising
from the purchase of goods and services. Pursuant to the Plan of
Reorganization, allowed claims in Class 6 will be satisfied by the Company
subject to the following terms and conditions: (i) all unpaid principal and
accrued but unpaid interest, if any, shall be due and payable on March 15, 1998
("Unsecured Maturity Date"); (ii) from the Filing Date through the Unsecured
Maturity Date, interest at the
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rate of five percent (5%) per annum, simple, shall accrue on each allowed
Class 6 claim; and (iii) to the Unsecured Maturity Date, interest and
principal shall be paid in eighteen monthly installments, beginning with the
first payment on the Effective Date.
Class 7 and Class 8 comprise, respectively, the equity interests
represented by the Company's Class A and Class B common stock. Pursuant to
the Plan of Reorganization, the holders of the Company's Common Stock will
retain the equity interests represented by such stock, subject to dilution by
virtue of the issuance of Common Stock and warrants to the Lender Group in
connection with their Class 1 claims. Further, as noted above, the Company's
formerly outstanding Class A and Class B common stock have been reclassified
as one class of Common Stock having the same voting rights, preferences and
privileges. Such Common Stock trades on the Nasdaq SmallCap market under the
symbol "DEPC." Stockholders will not be required to exchange their shares in
connection with the reclassification. Immediately prior to the Effective
Date, the Company had 6,251,140 shares of Common Stock outstanding. After
giving effect to the 542,488 shares of Common Stock issuable in connection
with the Plan of Reorganization, the Company will have outstanding 6,793,628
shares of Common Stock. The Company has reserved 330,050 shares of Common
Stock for issuance in connection with warrants issuable under the Plan of
Reorganization.
Additionally, the Plan provides for the treatment of certain "unclassified"
claims. First, allowed administrative claims, which generally comprise
liabilities incurred by the Company during the pendency of its chapter 11 case
(the "Chapter 11 Case"), are to be paid as soon as such claims would have become
due in the ordinary course of business, or under the terms of such claims, in
the absence of the reorganization case. Second, allowed claims for taxes
entitled to priority under Bankruptcy Code section 507(a)(8) are to be paid in
deferred cash payments over a period not exceeding six years from the date of
assessment of such tax claim, in an aggregate amount equal to the amount of such
allowed claim, plus simple interest on the unpaid portion of such allowed claim
at the statutory rate provided for such taxes under non-bankruptcy law, without
penalty of any kind. Further, the Company may pay the remaining balance on any
priority tax claim at any time, in full, without premium or penalty of any kind.
The Plan of Reorganization sets forth the terms of the new term loan
agreement (the "Credit Facility") governing the secured indebtedness owed by
the Company to the Lender Group (i.e., the Class 1 claims). The Plan of
Reorganization further contemplated that the Company would execute a warrant
agreement (the "Warrant Agreement") setting forth the terms of the warrants
issued to the Class 1 claimants (as described above). As of November 12,
1996, the Lender Group had not yet executed the Credit Facility or the
Warrant Agreement, because the Company and the Lender Group had not yet fully
resolved a small number of issues that remain in dispute between them
relating to the Plan of Reorganization. The Company does not believe that
such issues, however resolved, will have any material impact on the Company.
As part of the resolution of such issues, the Company may extend the time
available to members of the Lender Group to make an election that was
available to them under the Plan of Reorganization with respect to the
receipt of warrants or shares of Common Stock. Specifically, under the Plan
of Reorganization members of the Lender Group were entitled to elect (on an
individual basis) to receive their pro rata share of either (i) 625,000 shares
of Common Stock or (ii) 500,000 shares of Common Stock plus 500,000 warrants.
Accordingly, the number of shares and warrants issuable to the Lender Group
as referenced in the treatment of Class 1 claims above (and elsewhere herein)
is subject to change. Notwithstanding the Lender Group's failure to execute
the Credit Facility, the material terms of such Credit Facility, as
summarized above and elsewhere herein, became effective and binding on the
Company and the Lender Group as of November 4, 1996, pursuant to the terms of
the Plan of Reorganization and the order of the Bankruptcy Court confirming
such Plan entered on October 23, 1996.
Pursuant to Section 362 of the Bankruptcy Code, during a chapter 11 case,
creditors and other parties of interest may not, without Bankruptcy Court
approval: (i) commence or continue a judicial, administrative or other
proceeding against the company which was or could have been commenced prior to
commencement of the chapter 11 case, or recover a claim that arose prior to
commencement of the case; (ii) enforce any pre-petition judgments against the
company; (iii) take any action to obtain possession of property of the company
or to exercise control over property of the company or their estates; (iv)
create, perfect or enforce any lien against the property of the company; (v)
collect, assess or recover claims against the company that arose before the
commencement of the case; or (vi) offset any debt owing to the company that
arose prior to the commencement of the case against a claim of such creditor or
party-in-interest against the company that arose before the commencement of the
case.
Although the Company was authorized to operate its business as a
debtor-in-possession, it could not engage in transactions outside the
ordinary course of business without first
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complying with the notice and hearing provisions of the Bankruptcy Code and
obtaining Bankruptcy Court approval when necessary.
During the Chapter 11 Case a committee of unsecured creditors was formed by
the United States Trustee. Such committee reviewed and participated in the
development of the Plan of Reorganization. The Company is required to pay
certain expenses of this committee, including legal and accounting fees, to the
extent allowed by the Bankruptcy Court. The Company has also agreed with the
Lender Group to pay up to a maximum of $1,150,000 of their professional fees
incurred as part of the Chapter 11 Case. At July 31, 1996, the Company had
incurred approximately $3,900,000 of expenses related to its Chapter 11 Case and
reorganization, including its own professional fees of $1,500,000, the Lender
Group professional fees noted above and $1,350,000 for the write-off of deferred
debt issuance costs related to the pre-petition bank facility, offset in part by
$100,000 of interest income earned on payment deferral of pre-petition
liabilities.
The Plan of Reorganization imposes certain obligations upon the Company in
satisfaction of claims asserted against, and interests in, the Company. On and
after the Effective Date, the Company is authorized to conduct its business and
engage in transactions in and outside of the ordinary course of business without
being subject to Bankruptcy Code compliance or Bankruptcy Court approval. In
accordance with the terms of the Plan of Reorganization, the rights afforded
under the Plan of Reorganization and the treatment of all claims and interests
therein are in exchange for and in satisfaction of, discharge and release of all
claims against, and interests in, the Company.
BUSINESS RESULTS
The following table sets forth the dollar volume and percentage of
consolidated net sales attributable to Consumer Products and Contract Packaging
during the past three fiscal years:
Years Ended July 31,
------------------------------------------------------------
(Dollars in thousands)
1996 1995 1994
------ ------ ------
Consumer Products:
Hair care $ 87,481 73% $ 94,769 74% $100,782 73%
Skin care 15,201 13 16,353 13 13,974 10
Oral care 11,333 10 12,211 10 19,832 15
Other 10 - (51) - 343 -
-------- --- -------- --- -------- ---
Total Consumer Products 114,025 96 123,282 97 134,931 98
Contract Packaging 5,063 4 4,407 3 3,400 2
-------- --- -------- --- -------- ---
Consolidated net sales $119,088 100% $127,689 100% $138,331 100%
-------- --- -------- --- -------- ---
-------- --- -------- --- -------- ---
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INTERNATIONAL
Consumer Products are marketed and sold internationally principally through
agents, distributors and licensees in over 50 countries, including Canada, the
United Kingdom, Japan, Australia, Mexico, Venezuela, Panama, and through a joint
venture in China.
In fiscal 1996, approximately $18,843,000 or 15.8% of the Company's
consolidated net sales were international, as compared with approximately
$19,673,000 or 15.4%, and $15,275,000 or 11.0% in 1995 and 1994, respectively.
(See "Note 14 of the Notes to Consolidated Financial Statements.") The
Company's foreign operations are subject to risks inherent in transactions
involving foreign currencies and fluctuating exchange rates.
Prior to February 1996, the Dep brand of products were distributed by a
licensee in Canada and the Company received royalty payments equal to a
percentage of such licensee's net sales. Effective February 1, 1996, such
license agreement was canceled and the Company now directly distributes the Dep
brand of products in Canada and recognizes the revenues and expenses from such
sales.
From August 6, 1993 until December 31, 1993, Agree products in Australia
and Japan were distributed by licensees and the Company received royalty income
equal to a percentage of the licensees' net sales. During the last seven months
of fiscal 1994 and all twelve months of fiscal 1995 and 1996, the Company
recognized revenues and expenses on the Agree products sold through a
distributor and agent in these countries.
MARKETING
The Company markets most of its Consumer Products as high quality,
value-priced products. 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 its network of United States retailers and 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. Management refers to this flexible, brand-by-brand marketing
approach as "guerrilla marketing," because it aims to maximize the impact of
the Company's limited advertising and marketing resources.
To encourage retailer support for the Consumer Products, the Company
utilizes a variety of marketing techniques, including cooperative advertising,
temporary price reductions, promotional allowances, in-store displays, special
promotional events and free goods. Management believes that a substantial
portion of its promotional allowances are passed on to consumers in the form of
every day low prices ("EDLP"). Management further believes that EDLP has
contributed to the long-term success of L.A. Looks, Dep styling products, and
certain of the Company's other product lines.
To encourage retail sales, the Company utilizes various consumer marketing
techniques at the point of sale. These include providing bonus and trial sizes,
distributing coupons and utilizing packaging intended to heighten consumer
recognition and retail shelf presence. The
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Company also utilizes consumer media advertising on selected brands of the
Consumer Products. In recent years the Company has allocated the majority of
media dollars to print advertising which has allowed it to portray a brand
image and educate the consumer as to the benefits of specific products.
The Company employs nine professionals who are each responsible for the
marketing of specific product lines. In addition, 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 from its inception and are responsible for the product's
development, timely delivery, cost, management and growth. This system is
intended to enhance the Company's ability to meet consumer demand for low cost,
high quality products.
DISTRIBUTION
The Company employs 14 sales managers who are primarily responsible for the
Company's 200 largest customers which, as a group, represent over 75% of the
Company's Consumer Products volume. These managers, in turn, utilize 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
managers in selling the Consumer Products and carrying out trade promotions.
MANUFACTURING
During fiscal 1996, the Company's facility in Rancho Dominguez, California
performed approximately 92% of the manufacturing and packaging for Consumer
Products sold within the United States or exported, with the remainder performed
by contract manufacturers. (See "Item 2 Property.") This percentage increased
from 85% in 1995 as the Company increased the percentage of its export units
manufactured in its facility. In Australia, the Agree shampoo and conditioner
products continue to be produced by a contract manufacturer, and products sold
in China are manufactured by the Company's joint venture plant in that country.
To monitor the quality of its domestic and international 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 operations. The Company also maintains product liability
insurance at levels which it believes to be adequate.
All principal raw materials and components used by the Company to
manufacture and package its Consumer Products are generally available from
several 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. Backlog orders for the
Company's Consumer 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.
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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. The Company generally does not
provide any extended payment terms to its customers.
RESEARCH AND DEVELOPMENT
The Company engages in a continuous research and development program for
all of the Consumer Products. The Company has developed and manufactured
hundreds of personal care products for its Consumer Products business and its
Contract Packaging business. In this process, it has accumulated a file of more
than 800 different formulations of such products. In management's view, the
Company's 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 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 considers the L.A. Looks, Dep, Agree, Halsa, Lilt, Topol,
Lavoris, Natures Family, Porcelana and Cuticura trademarks among its most
important assets. The Company has registered, or has made application for
registration of, these trademarks in the United States and certain other
countries. Formulas for personal care products are typically not patentable.
CUSTOMERS AND COMPETITION
During fiscal 1996, sales to Wal-Mart Stores, Inc. were 17% 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. No other customer accounted for more
than 10% of consolidated net sales for fiscal 1996. None of the Company's
customers has any contractual obligation to make any purchase from the Company.
The market for Consumer Products is highly competitive and is dominated by
large multi-national corporations with greater financial and other resources
than the Company. The Company competes with hair, skin and oral care
manufacturers with respect to quality, packaging, marketing and price. (See
"Marketing" above.)
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CONTRACT PACKAGING
The Company also is engaged in the contract packaging and private label
businesses, in which it manufactures a wide variety of hair, skin and oral care
products for sale by retailers, distributors and other manufacturers under their
own trademarks. These two businesses are highly competitive and volume is
subject to fluctuation. Contract packaging and private label net sales averaged
less than 5% of consolidated net sales for the Company's three most recent
fiscal years. Contract packaging and private label net sales increased 15% in
fiscal 1996 as compared to fiscal 1995 and the Company plans to continue to
increase the volume of such business in order to utilize excess plant capacity
and recognize economies of scale.
EMPLOYEES
At July 31, 1996, the Company employed approximately 300 full-time persons
in the United States and Canada and 60 in the China joint venture operation.
None of such employees were covered by a collective bargaining agreement. The
Company has never experienced a work stoppage or interruption due to a labor
dispute and believes that its employee relations are satisfactory.
In February 1996 and 1995, the Company initiated plans to reduce operating
expenses. As part of such plans, the Company reduced its non-production work
force in 1996 and 1995 by approximately 12% and 9%, respectively. The benefit
of the work force reductions, net of severance costs, in 1996, including the
1995 annual carryover benefit of $1,080,000, approximated $1,570,000. The
combined annual benefit of the 1996 and 1995 work force reductions approximate
$2,300,000.
The Board of Directors recognized 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 departure or distraction of
management personnel to the detriment of the Company and its stockholders. The
Board 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 and to
assist them in their transition to subsequent employment. 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. In addition, as provided by the RSP,
the Company has entered into individual agreements with certain exempt employees
and other key executives providing them
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with Change in Control Executive Severance Agreements and Change in Control
Retention Bonus Agreements. These agreements were approved by the
independent, non-management members of the Company's Board of Directors.
GOVERNMENT REGULATION
The Company is subject to the health and safety, cosmetic and labeling
requirements of the federal Food, Drug and Cosmetic Act and to the labeling
provisions of the federal Fair Packaging and Labeling Act. The Company is also
under the jurisdiction of the Federal Trade Commission with respect to content
of 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, which
consist of approximately 180,000 square feet of manufacturing, warehousing,
laboratory and office space. (See "Note 4 of the Notes to Consolidated
Financial Statements.") The Company also warehouses its products 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.
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 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. (See
"Item 1 Business --Reorganization.")
The nature of the Chapter 11 Case is to have all claims against and
interests in the Company resolved. Accordingly, during the Chapter 11 Case, the
Bankruptcy Court ordered that any entity desiring to participate in any
distributions under the Plan of Reorganization must either have been previously
properly scheduled by the Company or filed a proof of claim with the Bankruptcy
Court on or before May 28, 1996. For bankruptcy purposes, a valid and
enforceable claim is referred to as an "allowed claim." During the Chapter 11
Case, the Company filed objections to certain proofs of claim, which objections
will be resolved by the Bankruptcy Court.
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 (the "Principal Case") 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
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Company in August 1993. The complaint requested rescission of the
transaction, actual and punitive damages in an amount to be determined, and
other relief. In January 1996 the District Court issued a partial summary
judgment dismissing the claims for fraud, rescission and punitive damages and
permitting the Company to proceed under breach of contract. The Principal
Case, scheduled for trial in September 1996, has been stayed pending the
outcome of the fraudulent transfer action, described below, that the Company
filed against S.C. Johnson in June 1996 which is pending before the
Bankruptcy Court.
In April 1994, S.C. Johnson filed a libel action against the Company in
Wisconsin and S.C. Johnson's subsidiary ("SCJ Canada") filed a lawsuit against
the Company in Ontario, Canada. The Company previously has demanded that its
insurance carriers settle the libel action within coverage limitations (in
excess of $10,000,000), but to-date no settlement has been reached.
S.C. Johnson has filed a proof of claim in the Bankruptcy Court asserting in
excess of $12,000,000 on account of the libel action. The Canadian lawsuit
(which has been stayed pending the Chapter 11 Case) alleges that the Company is
indebted to SCJ Canada in the amount of $1,400,000 for goods sold and delivered,
plus interest and costs. Both S.C. Johnson and SCJ Canada have filed proofs of
claim asserting over $1,400,000 on account of the Canadian lawsuit.
On June 17, 1996, the Company filed an "Objection and Counterclaim" in the
Bankruptcy Court in response to these claims and others asserted by
S.C. Johnson. In its Objection and Counterclaim, the Company maintains that it
has no liability whatsoever with respect to the libel matter. The Company also
maintains that pursuant to terms of the relevant agreements, the Company did not
enter into, and is not obligated on, any contract to purchase goods with SCJ
Canada; all relevant agreements were entered into between the Company and
S.C. Johnson, as to which the Company holds claims far in excess of $1,400,000,
plus interest and costs.
S.C. Johnson also has filed a proof of Claim asserting that under the
relevant agreements entered into between the Company and S.C. Johnson relating
to the Agree and Halsa acquisition, S.C. Johnson is the "prevailing party" as a
result of the District Court's dismissal of the Company's claims for fraud,
rescission and punitive damages, and that S.C. Johnson is entitled to recovery
of attorneys' fees in excess of $1,500,000. In its Objection and Counterclaim,
the Company disputes this contention and maintains that the Company will be
entitled to recover its fees, costs and damages by virtue of S.C. Johnson's
breach of the relevant agreements.
In its Objection and Counterclaim, the Company also asserts counterclaims
against S.C. Johnson and SCJ Canada based upon breach of contract and Bankruptcy
Code Sections 544(b) and 550(a)(1) and applicable state fraudulent transfer law
that (a) the Company received less than reasonably equivalent value in the Agree
and Halsa acquisition; (b) the Company (i) was engaged or was about to engage in
a business or a transaction for which the remaining assets of the Company were
unreasonably small in relation to the business or transaction, and (ii) the
Company reasonably should have believed that as a result of the acquisition the
Company would incur debts beyond its ability to pay as they become due; and (c)
therefore, the Company may recover for the benefit of the estate, any transfer
to S.C. Johnson or its affiliates, or if the Bankruptcy Court so orders, the
value of such transfer. The Company maintains that its counterclaims against
S.C. Johnson and its affiliates are well in excess of any claims of S.C. Johnson
and its affiliates.
11
On or about August 1, 1996, S.C. Johnson and SCJ Canada in the Bankruptcy
Court filed their "Answer and Counterclaim" to the Company's Objection and
Counterclaim. In its Answer and Counterclaim, S.C. Johnson and SCJ Canada deny
the Company's claims and assert that if the Company prevails on its Objection
and Counterclaim, the Company will be required to return any sums recovered
thereby on the grounds that the Company will have allegedly (i) breached
representations to S.C. Johnson, (ii) failed to pay the purchase price under the
purchase agreement, and (iii) made negligent misrepresentations in connection
with the transaction. S.C. Johnson and SCJ Canada also asserted claims for
setoff and recoupment on account of their claims against the Company, and claims
for attorneys' fees and expenses in defending the Objection and Counterclaim.
The Company vigorously disputes the contentions contained in the Answer and
Counterclaim.
On or about September 16, 1996, S.C. Johnson filed with the Bankruptcy
Court a motion for an order (i) dismissing that portion of the Company's
Objection and Counterclaim based upon breach of contract or, in the alternative,
staying or abstaining from the breach of contract counterclaim, and (ii)
transferring venue to the District Court on that portion of the Company's
Objection and Counterclaim based upon fraudulent transfer. The Company has
opposed S.C. Johnson's motion, contending that the Bankruptcy Court should stay
that portion of the Objection and Counterclaim based upon breach of contract,
pending the Bankruptcy Court's resolution of the Company's fraudulent transfer
counterclaims, and that the Bankruptcy Court should deny the balance of the
relief requested in S.C. Johnson's motion. The Bankruptcy Court had scheduled a
hearing on this motion for October 23, 1996, however, both parties agreed to
continue such hearing for approximately two weeks.
In addition, S.C. Johnson has filed a motion with the Bankruptcy Court
requesting that the Bankruptcy Court dismiss that portion of the Company's
Objection and Counterclaim against Johnson Canada based upon breach of contract
and fraudulent transfer, contending that the Objection and Counterclaim fails to
state a claim upon which relief can be granted. The Company has opposed this
motion, and the Bankruptcy Court has scheduled a hearing thereon concurrent with
the above referenced hearing.
A status conference in the fraudulent transfer action is tentatively
scheduled for December 4, 1996 before the Bankruptcy Court.
The projections accompanying the Company's Disclosure Statement included in
the Company's estimate of all allowed general unsecured claims a potential
allowed claim in the amount of $1,400,000, representing the approximate
potential liability to S.C. Johnson in respect of the above referenced claim for
goods delivered. The Company's projections did not include any other potential
claims of S.C. Johnson or its affiliates, or otherwise make provision for the
satisfaction of any such other claims of S.C. Johnson or its affiliates. All
told, S.C. Johnson and its affiliates have asserted disputed claims against the
Company in excess of $15,000,000, of which approximately $12,000,000 is based
upon S.C. Johnson's disputed libel claim against the Company (which libel claim
is in turn subject to the Company's settlement demand previously made upon the
Company's insurance carriers.) The allowance, without offset or insurance
coverage, of claims in favor of S.C. Johnson and its affiliates in excess of
$1,400,000 could have a materially adverse effect on the Company's business
operations and ability to meet
12
its obligations under the Plan of Reorganization. As noted above, the Company
vigorously disputes all claims asserted by S.C. Johnson and its affiliates.
On September 17, 1996, Clinique Laboratories, Inc. filed a civil action
complaint against the Company, in the United States District Court, Southern
District of New York (96 Civ. 7045 (SAS)). The complaint alleged, among
other things, trademark infringement, copyright infringement, trademark and
trade dress dilution, and unfair competition related to the Company's test
market of a new skin care line of products under the name "basique simplified
skin care ("basique")." On October 10, 1996, the District Court issued a
preliminary injunction prohibiting the Company from selling basique as
currently labelled and requiring the Company to recall such product from
retailers. The preliminary injunction does not prohibit the Company from
using the basique name. However, it does require a change to the basique
trade dress. Sales of the basique products were in a limited test market at
the time of the preliminary injunction and the Company anticipates that the
total costs associated with the recall, including legal expenses, will be
approximately $600,000, which will be recognized during fiscal year ending
July 31, 1997.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
As described under "Item 1 Business -- Reorganization," on September 9,
1996, the Bankruptcy Court approved as adequate the Company's Disclosure
Statement for use by the Company in soliciting votes on the Plan of
Reorganization from the Lender Group and the Company's stockholders. Such
Disclosure Statement thereupon was mailed to the Company's stockholders and
Lender Group, with a deadline of October 16, 1996 for the receipt of ballots
accepting or rejecting the Plan of Reorganization. One hundred percent (100%)
of the Lender Group and approximately ninety-nine percent (99%) of the Class A
and Class B stockholders voted to accept the Plan of Reorganization. On
October 23, 1996, the Bankruptcy Court entered its order confirming the Plan of
Reorganization.
13
PART II
ITEM 5 MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Class A and Class B common stock of the Company was traded on the
Nasdaq National Market until November 2, 1995, and since such date has been
traded on the Nasdaq SmallCap Market. As provided in the Company's Plan of
Reorganization, confirmed by the Bankruptcy Court on October 23, 1996, on or
about November 4, 1996 the existing Class A and Class B common stock was
reclassified as a single class of DEP Common Stock, and upon such
reclassification, all of the Company's Common Stock has the same voting rights,
preferences and privileges. Following such reclassification, DEP Common Stock
now trades on the Nasdaq SmallCap Market under the symbol "DEPC."
The following table sets forth the high and low closing sale prices of the
Class A and Class B common stock:
1996 1995
------------------ ------------------
HIGH LOW HIGH LOW
------ ------ ----- -----
CLASS A First Quarter 2 5/8 1 7/16 3 7/8 2 5/8
Second Quarter 1 9/16 1 3 3/8 2 1/4
Third Quarter 1 7/8 9/16 2 3/8 1 1/2
Fourth Quarter 2 1/4 7/8 3 15/16
CLASS B First Quarter 2 5/8 1 1/2 4 1/4 2 3/4
Second Quarter 2 1/8 1 3 3/4 2 3/8
Third Quarter 1 15/16 1/2 2 7/8 1 5/8
Fourth Quarter 2 11/16 3 1/4 1 7/8
The closing sales price per share of Common Stock on November 5, 1996 was
$2.375. On November 5, 1996, there was a total of 286 record holders of Common
Stock.
Since its formation the Company has not paid cash dividends on its common
stock and it does not currently anticipate paying such dividends. The Company's
current policy is to retain earnings to provide funds for the operation and
expansion of the Company's business. In addition, the Company's term loan and
credit agreements prohibit, 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 and 16 of the Notes to Consolidated Financial
Statements.")
14
ITEM 6 SELECTED FINANCIAL DATA
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA
(In thousands, except per share data)
Years ended July 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ---------
STATEMENT OF OPERATIONS DATA
Net sales................................................... $119,088 $127,689 $138,331 $123,713 $120,273
Gross profit................................................ 74,066 80,194 87,646 78,666 76,870
Operating expenses ......................................... 70,986 78,728 88,525 74,388 64,613
Income (loss) from operations before write-downs............ 3,080 1,466 (879) 4,278 12,257
Write-down in assets........................................ 25,166 1,003 -
Income (loss) from operations .............................. 3,080 (23,700) (879) 3,275 12,257
Other expense, primarily interest........................... 7,143 6,123 4,494 1,706 2,184
Reorganization items (1).................................... 3,895 -
Income (loss) before income taxes (credits) ................ (7,958) (29,823) (5,373) 1,569 10,073
Net income (loss)........................................... (7,958) (26,958) (3,583) 1,170 5,963
Fully diluted net income (loss) per share................... ($1.27) ($4.32) ($0.57) $0.18 $0.95
July 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
----------- ----------- ----------- ----------- ---------
BALANCE SHEET DATA
Working capital (deficiency)................................ $29,288 ($35,682) $20,416 $23,587 $20,090
Total assets................................................ 89,838 93,904 122,095 78,629 76,176
Long-term debt, net of current portion (2)................. 3,597 3,744 60,974 19,557 18,198
Stockholders' equity........................................ 3,282 11,227 38,155 41,640 40,654
Shares outstanding ......................................... 6,251 6,245 6,231 6,223 6,221
(1) Net reorganization items incurred as a result of the Chapter 11 filing.
(2) Excludes liabilities subject to compromise of $67,783 at July 31, 1996.
15
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
FISCAL 1996 COMPARED TO FISCAL 1995
Consolidated net sales for 1996 were $119,088,000 compared to $127,689,000
in 1995. Consumer Products net sales in 1996 accounted for 96% and 97% of the
consolidated net sales for 1996 and 1995, respectively.
Consumer Products net sales 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, worldwide net sales of Agree and
Halsa have declined more than $40,000,000. Such decline is 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.
Consumer Products hair care net sales decreased 8% in 1996, primarily as a
result of continued lower sales of Agree and Halsa. Aggregate net sales of
Agree and Halsa were approximately $22,350,000 in 1996, or approximately 17%
lower than the prior year. Hair care net sales, excluding Agree and Halsa,
decreased 4% in 1996, compared to 1995, primarily as a result of a L.A. Looks
promotion which occurred in 1995, but was not repeated in 1996, and lower sales
in China as a result of more stringent credit limits. These decreases were
offset, in part, by an increase in Canadian sales. Prior to February 1996, the
Dep brand of products were distributed by a licensee in Canada and the Company
received royalty payments equal to a percentage of such licensee's net sales.
Effective February 1, 1996, such license agreement was canceled and the Company
now directly distributes the Dep brand of products in Canada and recognizes the
revenues and expenses from such sales.
Net sales of skin care and oral care products each declined 7% in 1996.
All of the skin care brands experienced decreases in unit volumes. The effect
of a Natures Family promotion in the fourth quarter of 1995, which was not
repeated in 1996, was the primary factor for the decreased skin care sales. The
decline in oral care net sales was the result of lower sales volume of Topol
offset, in part, by increased Lavoris sales volume. Topol sales in 1996 were
adversely effected by competitors new product introductions.
Consumer Products net sales in the United States decreased 8%, again
primarily as a result of the continued decline of Agree and Halsa sales. In
1996, domestic net sales of Agree and Halsa decreased approximately 16%. In
addition, domestic Consumer Products sales were adversely affected by the L.A.
Looks 1995 promotion which was not repeated in 1996, and decreased domestic
sales of skin care and oral care products of 7% and 10%, respectively.
International net sales of Consumer Products decreased 4% principally due
to lower sales of Agree in Australia and lower sales in China. These decreases
were offset, in part, by the increase in Canadian sales.
16
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. International and Contract Packaging sales generate lower gross margins
as a percentage of net sales, but incur lower selling expenses as compared to
domestic Consumer Products.
Selling, general and administrative expenses ("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 other expenses increased to $7,143,000 in 1996 from $6,123,000 in 1995
as a result of higher interest expense. The higher interest expense resulted
from higher interest rates and a higher average principal balance. The
Company's principal balance increased due to the deferral of interest payments
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,
offset, in part, by $115,000 of interest income earned on payment 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, 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 write-down in
value of Agree and Halsa assets of $24,072,000 and higher SG&A expense,
offset, in part, 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.
FISCAL 1995 COMPARED TO FISCAL 1994
Consolidated net sales for 1995 were $127,689,000 compared to $138,331,000
in 1994. Consumer Products net sales in 1995 decreased by 9% compared to 1994.
Consumer Products accounted for 97% and 98% of the consolidated net sales for
1995 and 1994, respectively.
17
Hair care net sales decreased 6% in 1995, principally due to lower sales of
Agree and Halsa. Aggregate net sales of Agree and Halsa were approximately
$26,800,000 in 1995, or 25% lower than the prior year. Hair care net sales,
excluding Agree and Halsa, increased 4% in 1995, compared to 1994, primarily as
a result of double digit domestic unit volume growth in both the L.A. Looks
styling and Dep gel product lines, offset in part by declines in Lilt and hair
care products which were discontinued in 1994.
Skin care net sales increased 17% in 1995 over 1994 primarily as a result
of unit growth in the Natures Family brand.
Oral care net sales for 1995 decreased by 38% compared to 1994. Although
net sales of all oral care brands declined, Lavoris mouthwash and Jordan
toothbrushes accounted for approximately 80% of such decline. Oral care brands
were adversely impacted by intense competition and new product introductions by
competitors. In addition, in 1995 Crystal Fresh Lavoris and Jordan toothbrushes
sold at minimal levels compared to 1994. Crystal Fresh Lavoris no longer
represents a significant component of oral care sales and the Company terminated
the Jordan toothbrush distribution agreement in 1996.
Domestic net sales of Consumer Products decreased 13% in 1995, again,
primarily as a result of the decline in the net sales of Agree and Halsa. In
1995, domestic net sales of Agree and Halsa were approximately $15,600,000, or
42% lower than 1994. Such decline was offset, in part, by sales growth of the
L.A. Looks styling and Dep gel products. Domestic net sales of hair care
products, excluding Agree and Halsa, increased 2% in 1995, compared to 1994.
Also contributing to the decrease in domestic net sales of Consumer Products was
a 41% decline in oral care in 1995 as compared to 1994, for the same reasons
described in the preceding paragraph.
International net sales of Consumer Products in 1995 increased 29% compared
to 1994, primarily due to higher sales of Agree in Japan and Australia. From
August 6, 1993 until December 31, 1993, Agree products were distributed by
licensees in Japan and Australia and the Company received only royalty payments
equal to a percentage of such licensees' net sales. During the last seven
months of fiscal 1994 and all twelve months of 1995 the Company sold the Agree
products in Japan and Australia through a distributor and agent and, therefore,
recognized revenues and expenses from such sales. In addition, the Company
entered into a joint venture in China, effective November 1993.
Gross profits for 1995 were $80,194,000, compared to $87,646,000 in 1994.
As a percentage of net sales, gross profit for both 1995 and 1994 was 63%. The
gross profit percentage in the current period was somewhat lower than historic
rates due to a lower proportion of sales of higher margin products, while in
1994 gross profit was adversely impacted by a provision for packaging changeover
costs. In dollar terms gross profit in 1995 declined as a result of lower sales
volume.
In 1995, selling, general and administrative expenses ("SG&A") decreased to
$78,728,000 or 62% of net sales from $88,525,000 or 64% in 1994. The decrease
in SG&A, as a percentage of sales, was primarily due to lower advertising and
consumer promotion
18
expense. The dollar decrease in SG&A relates to the impact of lower net
sales on variable expenses and lower advertising and consumer promotional
expense. For 1995, SG&A was also favorably impacted by the higher proportion
of international sales, as such sales typically incur lower SG&A expense than
domestic sales. International operations include export sales, where third
party distributors generally incur the advertising and promotional
expenditures, and royalty income, where there are no related selling costs
recorded by the Company.
In February 1995, the Company initiated a plan to reduce operating
expenses. As part of that plan, among other things, the Company laid-off
approximately 9% of its non-production work force. The benefit of such work
force reductions in 1995, net of severance costs, approximated $292,000. The
annual benefit of the work force reduction approximates $1,080,000.
During the third quarter of fiscal 1995, the Company determined that in
light of the significant declines in the sales volume and profit contribution of
the Agree and Halsa products since their acquisition in August 1993, there had
been an impairment in the carrying value of the Agree and Halsa intangible
assets. Based on the results of an independent valuation, the Company concluded
that the fair value of the intangible assets of Agree and Halsa was
approximately $12,500,000, requiring a write-down in the carrying value of the
intangibles of $24,718,000. Such write-down was included in operations for
1995. In addition, due to the repackaging and restaging of such products, the
Company also wrote-off tools and molds of $448,000.
For 1995, net other expenses were $6,123,000 as compared to $4,494,000 in
1994. The increased expense was due to higher interest expense which resulted
from a higher effective interest rate during 1995.
The Company recorded a tax benefit of $2,865,000 for 1995 and $1,790,000
for 1994. In accordance with generally accepted accounting principles, the tax
benefit of the write-down of the Agree and Halsa intangibles in 1995 was limited
to that currently realizable. The tax benefit for 1994 was offset in part by
the effect of intangible amortization expense included in financial income, but
not deductible for tax purposes. (See "Note 9 of the Notes to Consolidated
Financial Statements.")
For 1995, the Company recorded a net loss of $26,958,000 or $4.32 per
share, compared to a net loss of $3,583,000 or $.57 per share in 1994. The loss
in 1995 was primarily due to the $24,072,000 after-tax write-down of the Agree
and Halsa assets, lower net sales, higher interest expense and a lower tax
benefit. Excluding the write-down of the Agree and Halsa assets, the Company's
operations for 1995 resulted in a net loss of $2,886,000 or $.47 per share.
LIQUIDITY AND CAPITAL RESOURCES
The following discussion of the Company's liquidity and capital resources
is based upon the Plan of Reorganization confirmed by the Bankruptcy Court on
October 23, 1996, having an Effective Date of November 4, 1996.
19
Pursuant to the Plan of Reorganization, the Bankruptcy Court approved a new
term loan agreement (the "Credit Facility") between the Company and the Lender
Group which, among other things, provides that the Company will repay
approximately $62,000,000 in long-term secured indebtedness, plus interest at
the prime rate plus 2%, which indebtedness matures on July 31, 2002. The Credit
Facility will have increasing quarterly principal payments commencing in the
amount of $100,000 on the Effective Date and progressively increasing to
$2,000,000 at June 2002, with a balloon payment of approximately $36,100,000 due
July 31, 2002. (See "Item 1 Business -- Reorganization.")
In conjunction with the Chapter 11 Case, on May 3, 1996 the Bankruptcy
Court granted the Company the full use of its cash collateral and existing bank
arrangements to conduct its operations. To date the Company's suppliers have
granted the Company payment terms, most of which are commensurate with terms
provided to the Company prior to the Chapter 11 Case. Accordingly, cash flow
and liquidity improved significantly as payments on pre-petition liabilities
were suspended until approved by the Bankruptcy Court.
As of October 15, 1996, the Company had cash and cash equivalents of
approximately $11,000,000. The cash balances at July 31, 1996 and October 15,
1996 were favorably impacted by the deferral of $6,100,000 in pre-petition
amounts owing to unsecured creditors, and $2,200,000 and $3,150,000,
respectively, relating to interest due the Lender Group at each such date.
Under the Plan of Reorganization pre-petition unsecured creditor claims will be
payable, plus 5% interest, in equal monthly installments commencing November
1996 through March 15, 1998 and interest due the Lender Group to the Effective
Date will be added to the Credit Facility's principal balance.
From the Filing Date until the Effective Date, 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, including those due under the Credit Facility and accounts
payable, were stayed and have been classified as non-current liabilities at
July 31, 1996, under the caption "liabilities subject to compromise" in the
consolidated balance sheet. (See "Note 1 of the Notes to Consolidated Financial
Statements.")
Working capital was significantly impacted by the classification of the
liabilities subject to compromise as non-current liabilities. In addition,
working capital was impacted by decreases in accounts payable, accounts
receivable and income taxes receivable and increases in other current assets and
accrued liabilities. The decrease in accounts payable was due to the
reclassification of pre-petition payables of $6,100,000 as liabilities subject
to compromise. The decrease in accounts receivable is due to lower sales volume
in the fourth quarter of 1996 compared to the fourth quarter of 1995. The
decrease in income taxes receivable results from
20
the receipt of income tax refunds of approximately $2,000,000 related to the
prior fiscal year. The increase in other assets primarily relates to
deposits toward inventory purchases of $430,000 and prepaid professional fees
of $250,000. The increase in accrued expenses primarily relates to the
accrual of unreimbursed Lender Group's professional fees of $1,075,000 which
the Company is obligated to pay in equal monthly installments over the twelve
months following the Effective Date.
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.
ACCOUNTING PRONOUNCEMENT
NEW ACCOUNTING STANDARDS
The Financial Accounting Standards Board has issued SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), issued in October 1995
and effective for fiscal years beginning after December 15, 1995. The
Company plans to adopt SFAS 123 in fiscal 1997 and anticipates that it will
not have a material impact on the Company's financial position or results of
operations. (See "Note 2 of the Notes to Consolidated Financial Statements.")
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, 1996 and 1995
Consolidated Statements of Operations for Years Ended
July 31, 1996, 1995 and 1994
Consolidated Statements of Stockholders' Equity for Years
Ended July 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows for Years Ended
July 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
SCHEDULE
Schedule II - Valuation and Qualifying Accounts and Reserves
21
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS OF
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
22
PART III
ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Information concerning the Company's current directors and executive
officers, based on data furnished by them, is set forth below:
NAME AGE POSITION
------ ----- ----------
Robert Berglass 58 Chairman of the Board;
President; Director
Grant W. Johnson 52 Senior Vice President; Chief Financial
Officer; Director
Alexander L. Kyman 67 Director
Michael Leiner 50 Director
Philip I. Wilber 69 Director
Jerome P. Alpin 59 Senior Vice President,
and General Manager,
International Sales and Marketing
Judith R. Berglass 44 Senior Vice President, Corporate
Secretary; Director
Stephen R. Berry 49 Vice President, Sales
D. Lee Johnson 48 Vice President, Administration and
Investor Relations
Mark M. Jagusiak 42 Vice President, Operations
John G. Petersen 38 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 35 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
23
Sassoon, Inc. Mr. Johnson, a certified public accountant, also has seven
years of experience with Deloitte & Touche.
Alexander L. Kyman has been a director of the Company since December
1994. Since January 1, 1994, Mr. Kyman has been the principal of Alex Kyman &
Associates, a business and financial consulting firm. For over 27 years
prior thereto he was employed by City National Bank where he served as Vice
Chairman for one year and as President and Chief Operating Officer for eight
years prior thereto.
Michael Leiner has been a director of the Company since December 1994.
Mr. Leiner is Chairman Emeritus of Leiner Health Products, Inc., a
manufacturer and marketer of pharmaceutical products. Since 1992 he has been
a consultant to that company and others. From 1979 to 1992, he served as
Chairman of the Board and Chief Executive Officer of Leiner Health Products,
Inc.
Philip I. Wilber has been a director of the Company since October 1993.
Mr. Wilber founded Drug Emporium, Inc. in 1977 and served as its President,
Chief Executive Officer and Chairman of the Board until 1989, and as its
Chairman of the Board from 1989 until his retirement in January 1992. He
then served as a director until January 1993 and has been a consultant since
that time. Drug Emporium is a chain of 136 company-owned deep discount drug
stores which also provides certain services for 100 independently franchised
stores operating under the same name.
Jerome P. Alpin is the Senior Vice President, General Manager for
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 27 years of experience
in sales and marketing of consumer 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 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.
Stephen R. Berry is the Vice President of Sales for domestic consumer
products and has been employed by the Company since 1983. He served as the
Company's Director of Sales from November 1993 through June 1995 and he also
held various managerial positions within the domestic sales department prior
thereto. Mr. Berry has over 14 years of experience in the sales and
marketing of consumer products.
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,
24
a certified public accountant, also has 18 years with The Dial Corporation,
where he last served as Vice President Planning and Development.
Mark M. Jagusiak is the Vice President of Operations and has been
employed by the Company since 1988. He served as the Company's Vice
President of Customer Service and Custom Manufacturing since July 1995 and he
has also held various managerial positions within the Operations department
prior thereto. Mr. Jagusiak has over 20 years of experience in pharmaceutical
and cosmetic manufacturing.
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.
All officers serve at the discretion of the Board of Directors.
BOARD OF DIRECTORS AND COMMITTEES
The Board held 11 meetings during fiscal 1996. Non-employee directors
receive an annual retainer of $6,000, plus $1,000 for each Board meeting
attended and $500 for each Committee meeting attended on a date different
from a Board meeting. In addition, each non-employee director is entitled to
receive $2,000 for service as chairman of a committee of the Board. During
fiscal year 1996, each director attended at least 75% of all meetings of the
Board and any committees of the Board on which such director served.
Under the Company's 1992 Stock Option Plan, each director of the Company
other than the Company's Chairman is entitled to receive an option grant
covering 1,000 shares of Class A common stock on the last business day of
each fiscal year, at an exercise price equal to the last reported sale price
on such day. Pursuant to an amendment to such Plan that was approved by the
Company's stockholders on January 9, 1996, any person becoming a director on
or after August 1, 1994 will receive a one-time grant of an option to
purchase 5,000 shares of Class A common stock at an exercise price equal to
the last reported sale price on the date of grant. On September 19, 1995,
Messrs. Leiner and Kyman each was granted an option to purchase 5,000 shares
at the price of $2.125 per share pursuant to the foregoing amendment.
However, in light of the Company's Chapter 11 Case, all of the directors
entitled to receive the annual grant covering 1,000 shares elected to defer
the receipt of shares during the fiscal year ended July 31, 1996.
The Board currently has an Audit Committee; Compensation and Management
Stock Option Committee (the "Compensation Committee"); and Employee Stock
Option Committee. The Board does not have a standing Nominating Committee.
During fiscal 1996, the Audit Committee's responsibilities included
selecting the Company's independent auditors, examining the results of the
annual audit and reviewing the Company's internal accounting controls and
estimated fees of services performed by the
25
Company's independent auditors. In addition, the Audit Committee advised the
Board as to particular accounting or financial matters which came to its
attention during the course of its review. Messrs. Kyman and Leiner are
currently the members of the Audit Committee, which held five meetings during
fiscal 1996.
The Compensation Committee is responsible for determining compensation
for the President and stock option grants to all executive officers. Messrs.
Wilber and Leiner are currently the members of the Compensation Committee,
which held two meetings during fiscal 1996.
The Employee Stock Option Committee is responsible for determining stock
option grants to employees who are not executive officers. Mr. Berglass is
currently the sole member of the Employee Stock Option Committee, which met
once during fiscal 1996.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 as amended (the
"Exchange Act"), requires the Company's officers and directors and persons
who own more than ten percent of a registered class of the Company's equity
securities to file reports of ownership and changes in ownership with the
Securities and Exchange Commission and to furnish the Company with copies of
such reports. Based on the Company's review of the copies of those reports
and written representations which it has received, the Company believes that
all such filings have been made. Mr. Jagusiak was late in filing a Form 5 to
report the expiration of certain stock options, which expiration was exempt
from liability under Section 16(b) of the Exchange Act.
ITEM 11 EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth compensation of the
Chief Executive Officer and the four other most highly compensated executive
officers of the Company for fiscal years 1996, 1995 and 1994:
26
SUMMARY COMPENSATION TABLE
Long-Term
Compensation
Awards
Annual Compensation (1) ---------------
Fiscal ----------------------- Stock Options All Other
Name Year Salary (2) Bonus (3) Number Granted Compensation (4)
---- ------ ---------- --------- --------------- ----------------
Robert Berglass 1996 $546,892 $ - - $1,750
President and 1995 523,651 - - 1,750
Chief Executive Officer 1994 566,085 - 30,000 2,724
Grant W. Johnson 1996 209,814 - - 2,284
Senior Vice President and 1995 204,990 - 26,000 1,210
Chief Financial Officer 1994 206,500 - 11,000 4,032
Jerome P. Alpin 1996 200,168 - - 3,419
Senior Vice President 1995 195,594 17,970 25,000 2,060
and General Manager, 1994 197,142 42,625 10,000 5,259
International Sales and
Marketing
Stephen R. Berry 1996 151,900 - - 1,815
Vice President, Sales 1995 142,200 9,157 10,000 1,293
1994 125,725 9,437 7,000 1,672
D. Lee Johnson 1996 134,750 - - 1,560
Vice President, 1995 103,077 17,970 8,500 848
Administration 1994 - - - -
(1) Base salaries for Messrs. Berglass, Grant Johnson and Alpin in fiscal year
1996 remained unchanged from the prior year level; however, during the
period March 1995 through October 1995 all three participated in voluntary
salary reduction which amounted to 15% for Mr. Berglass and 10% for Messrs.
Johnson and Alpin.
(2) Compensation deferred at the election of the executive pursuant to the DEP
Corporation Executive Deferred Compensation Plan (the "Deferred
Compensation Plan") is included as salary in the year earned. The Deferred
Compensation Plan was terminated in November 1995.
(3) Bonuses are included in the fiscal year earned, but are typically paid in
the following fiscal year. Bonuses paid are subject to the Company's 1993
Stock Target Ownership Plan pursuant to which executives receive a portion
of their bonus compensation in shares of Common Stock based on the fair
market value of such stock. The fiscal 1995 and 1994 bonuses paid to Mr.
Alpin included the fair market value of 1,734 and 2,765 shares of Class B
common stock, respectively. The fiscal 1995 bonus paid to Mr. D. Lee
Johnson included the fair market value of 1,734 shares of Class B common
stock.
27
(4) Amounts paid in fiscal 1996 represent (i) the value of group and
supplemental term life insurance provided in excess of $50,000 basic
coverage of $1,350 for Mr. Berglass, $1,884 for Mr. Grant Johnson, $3,019
for Mr. Alpin, $1,415 for Mr. Berry and $1,160 for Mr. D. Lee Johnson; and
(ii) $400 for each of the named officers as matching contributions under
the Company's 401(k) plan. No contribution was made by the Company to its
Profit Sharing Plan for either fiscal 1996 or 1995.
CHANGE IN CONTROL BENEFITS
The Company has entered into an Executive Severance Agreement (the
"Severance Agreement") and a Retention Bonus Agreement (the "Retention
Agreement") (collectively, the "Agreements") with each of the executive
officers named in the Summary Compensation Table above, and other executive
officers, with the exception of Messrs. Berglass and Berry, who are covered
only by a Severance Agreement. The Agreements provide for a severance
payment and a retention bonus payment should a change in control of the
Company occur.
The Severance Agreement provides an executive with a lump sum payment
based on an executive's current annual base salary, as of the date of
termination, as follows: (1) the President and senior vice presidents would
receive payments equal to 18 months of their annual base salary, (2) other
executive officers would receive payments equal to 12 or 18 months of their
annual base salary, and (3) other vice presidents and department directors
would receive payments equal to six months of their annual base salary plus
one month of the executive's annual base salary multiplied by a number equal
to the number of years the executive has been employed by the Company,
provided, however, that the maximum payment would not exceed 18 months of
such executive's annual base salary. In addition, all such executives would
receive life, disability, accident and group health insurance benefits for a
like period of time.
A change in control will be deemed to have occurred if: (i) Robert
Berglass, Judith R. Berglass and any controlled affiliate thereof
(collectively, "Berglass") no longer is the beneficial owner of securities of
the Company representing 26% or more of the combined voting power of the
Company's then outstanding securities; (ii) within a two consecutive year
period, members of the Board at the beginning of such period and approved
successors no longer constitute a majority of such Board, or (iii)
stockholders of the Company entitled to vote thereon approve a merger or
consolidation (with certain exceptions) or a plan of complete liquidation.
An executive is not entitled to receive any compensation or benefits
under the Severance Agreement subsequent to a change in control if the
executive's employment is terminated (i) due to the disability of the
executive, (ii) by the Company, for "just cause," as defined in the Severance
Agreement or (iii) by the executive other than for "good reason," as defined
in the Severance Agreement. Each Severance Agreement will terminate three
years from the date of execution and will automatically be extended for one
additional year unless either party gives notice to the other of its intent
not to extend the term.
The Retention Agreement provides that in the event a change in control
occurs within 24 months after such executive enters into such Retention
Agreement and (i) the executive remains in the employ of the Company for a
period of six months after such change in control or (ii) if such executive
is terminated by the Company or a successor, unless such termination is for
"just
28
cause," as defined in the Retention Agreement or voluntarily by the
executive other than for "good reason," as defined in the Retention
Agreement, then each executive listed on the Summary Table, with the
exception of Messrs. Berglass and Berry, will receive a lump sum payment
equal to approximately six months of the executive's annual base salary.
If payments and benefits under the Agreements pursuant to a change in
control would subject such executive to excise tax under Section 4999 of the
Internal Revenue Code or would result in the Company's loss of a federal
income tax deduction for such payments, then such payments and benefits shall
automatically be reduced to the extent necessary to avoid the imposition of
such tax penalty.
The Board believes that the Agreements, which were unanimously approved
by the independent, non-management directors, reinforce and encourage the
continued attention and dedication of members of the Company's management
team to their assigned duties. The Agreements protect the best interests of
the stockholders by assuring such executives a level of financial security
and inducing such executives to remain in the employ of the Company. The
Board believes that these advantages outweigh the cost of such benefits.
OPTION GRANTS
With the exception of options with respect to 10,000 shares of Class A
common stock granted to two non-employee directors, Messrs. Kyman and Leiner,
no other options were granted to executives or other employees during fiscal
1996.
OPTION EXERCISES AND VALUES
The following table presents information regarding options exercised to
acquire shares of the Company's common stock during fiscal 1996 and the
values of unexercised options held at the end of fiscal 1996:
AGGREGATED OPTION EXERCISES IN FISCAL 1996 AND 1996
FISCAL YEAR-END OPTION VALUES
Number of Value of Unexercised
Shares Number of Unexercised In-the-Money Options
Acquired Options at Fiscal Year End at Fiscal Year End (1)
on Value --------------------------- ----------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ---------- -------- ----------- ------------- ----------- --------------
Robert Berglass - $ - 79,800 50,200 $ - $ -
Grant W. Johnson - - 65,000 12,000 - -
Jerome P. Alpin - - 35,000 10,000 - -
Stephen R. Berry - - 6,000 12,000 - 1,250
D. Lee Johnson - - 5,000 3,500 - -
(1) Based on the difference between the closing price on the NASDAQ SmallCap
Market System of $1.25 for the shares of Class A common stock and $1.625
for the shares of Class B common stock at July 31, 1996, and the exercise
price of options having an exercise price lower than such closing prices.
29
COMPENSATION COMMITTEE REPORT
The Company's executive compensation policies are designed to develop a
high quality management team and to motivate this team to achieve the
Company's short-term and long-term goals. With this in mind, the Company
seeks to develop overall compensation programs which provide the competitive
compensation levels necessary to attract and retain experienced, innovative,
and well-qualified executives from the health and beauty care industry and
the Company's own middle management. The Company then seeks to provide such
executives with significant performance bonuses closely linked to their
achievement of objective financial goals, such as growth in net sales and
operating income and a favorable return on equity, and to more subjective
goals, such as organizational development, team work and corporate
efficiency.
Within this framework, the Company's Compensation Committee is
responsible for determining all aspects of the compensation for its president
and chief executive officer (the "CEO"), as well as the stock options to be
granted to the Company's other executive officers. The CEO is responsible
for establishing all compensation for the other executive officers, apart
from their stock options.
As one of the factors in its review of compensation matters, the
Compensation Committee considers the anticipated tax effect on the Company
and executives of various payments and benefits. Section 162(m) of the
Internal Revenue Code generally disallows the Company's deduction for
compensation in excess of $1,000,000 paid to the CEO or to any of the four
other most highly compensated executive officers, unless such excess
compensation qualifies as "performance-based compensation." The Compensation
Committee will not necessarily limit executive compensation to that which is
deductible by the Company under Section 162(m), but believes that Section
162(m) will not limit the deductibility of any compensation granted to date.
The three key components of the Company's compensation programs are base
salary, performance bonuses, and stock options.
BASE SALARY
Base salary levels for all executive officers are reviewed annually. As
part of this review, the Company takes into account the compensation packages
offered by other companies in the health and beauty care industry and focuses
particular attention on the compensation paid by a group of the Company's
peers (the "Peer Group"). The Company also gives consideration to the
experience, responsibilities, management and leadership abilities of its
individual executive officers and their actual performance on behalf of the
Company.
PERFORMANCE BONUSES
At the commencement of each fiscal year, the Company establishes
objective financial and certain subjective goals which are based upon and
exceed the Company's achievements in the prior year. Using these overall
goals as a basis, the CEO then establishes incentive programs which set forth
performance goals for the current fiscal year. In addition, at the end of
each fiscal year, the Company may award bonuses to recognize special
contributions made
30
by an executive or his department to long-term strategic goals not
specifically addressed in the individual incentive programs. In compliance
with the 1993 Stock Target Ownership Plan, a portion of the executive's
performance bonus may be paid in the form of common stock, with the remainder
paid in cash.
STOCK OPTIONS
The Compensation Committee utilizes stock options as a key incentive
because they provide executives with the opportunity to become stockholders of
the Company and thereby share in the long-term appreciation in value of the
Company's common stock. The Compensation Committee believes that stock options
are beneficial to the Company and its stockholders because they directly align
the interests of the Company's executives with those of its other stockholders.
The Compensation Committee determines the amount of stock options, if any,
to be granted from time to time to executive officers pursuant to the 1992 Stock
Option Plan. Options are granted at no less than prevailing market value and,
in the case of CEO incentive stock options, the exercise price is at least 110%
of such prevailing value. Accordingly, stock options will only benefit
executives if the price of the Company's stock increases over the option term.
The number of shares subject to individual options are usually based on the
performance of the executive team as a group, as well as on departmental and
individual contributions. Options are granted as compensation for performance
and as an incentive to promote the future growth and profitability of the
Company. In determining the number of shares subject to such options, the
Committee considers the option and other compensation policies of the industry,
with particular attention to the Peer Group. It also takes into account the
outstanding options already held by each individual executive officer, and the
projected value of the options based on historical and assumed appreciation
rates of the Company's common stock.
CEO COMPENSATION
As is the case for the other executive officers, the CEO's compensation
package consists of base salary, performance bonuses, and stock options.
The CEO's base compensation for fiscal 1996 was set by the Compensation
Committee in November 1995 and remained unchanged from the prior year's level.
In determining Mr. Berglass' compensation, the Compensation Committee considered
the overall compensation packages of other chief executive officers in the Peer
Group and other companies in the health and beauty care industry. In addition,
the Compensation Committee considered the Company's performance and its
achievement of its financial and business goals and evaluated Mr. Berglass'
overall individual performance, both in the prior fiscal year and in the prior
five years. The Compensation Committee does not assign relative weights or
rankings to each of these factors, but instead makes a subjective determination
based on consideration of all such factors.
The Compensation Committee met on October 23, 1996, to consider Mr.
Berglass' base salary for fiscal 1997 and to determine whether to award any
performance bonuses and stock
31
options to him with respect to fiscal 1996. Based upon the Company's
financial results for fiscal 1996 and the fact that the Company filed for
reorganization under chapter 11 of the Bankruptcy Code, the Compensation
Committee did not award Mr. Berglass a performance bonus or a base salary
increase for fiscal 1996 or 1997.
COMPENSATION COMMITTEE
Philip I. Wilber, CHAIRMAN
Michael Leiner
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Wilber and Leiner served on the Compensation Committee during 1996.
COMPANY STOCK PRICE PERFORMANCE GRAPH
The following graph compares the Company's total return to stockholders
over a five-year period commencing August 1, 1991 against the NASDAQ market
index and the Peer Group. The Peer Group currently consists of Chattem,
Inc., Del Laboratories, Inc. and Mem Company, Inc. The Peer Group for fiscal
1995 (the "1995 Group") consisted of St. Ives Laboratories, Inc.; Mem
Company, Inc.; Chattem, Inc. and Del Laboratories, Inc. In February of 1996
St. Ives Laboratories, Inc. was acquired by the Alberto-Culver Company. The
Company believes, that in view of its size and other factors, the
Alberto-Culver Company is not comparable to the Company or to other members
of the Peer Group.
COMPARISON OF FIVE YEAR
CUMULATIVE TOTAL RETURNS
[LINE GRAPH]
1991 1992 1993 1994 1995 1996
------ ------ ------ ------ ------ ------
DEP Corportion $100 $125 $71 $29 $21 $15
NASDAQ $100 $117 $143 $147 $206 $225
Peer Group $100 $118 $141 $113 $144 $253
32
33
ASSUMPTIONS:
Assumes $100 invested on August 1, 1991 with reinvestment of any dividends.
No dividends were paid on the Company's securities during the period.
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following information is set forth as of October 15, 1996 with respect
to the Company's chief executive officer and four most highly compensated other
officers, each director, all directors and executive officers as a group, and
each other person or group known to the Company to be the beneficial owner of
more than 5% of the outstanding shares of Class A or Class B common stock:
CLASS A COMMON STOCK CLASS B COMMON STOCK
-------------------------------------------- ---------------------------------------------
NAME & ADDRESS OF BENEFICIALLY OPTIONS PERCENT BENEFICIALLY OPTIONS PERCENT
BENEFICIAL OWNERS (1): OWNED (2) EXERCISABLE (2) OF CLASS OWNED (2) EXERCISABLE (2) OF CLASS
- ---------------------- ------------- --------------- --------- ------------- --------------- ----------
DIRECTORS AND OFFICERS
Robert Berglass 748,030 67,300 23.5 1,093,230 12,500 34.7
Judith R. Berglass (3) 468,398 32,500 14.9 38,398 2,500 1.2
Grant W. Johnson 63,064 62,500 2.0 7,430 2,500 *
Philip I. Wilber - 6,000 * - - -
Michael Leiner - - - 15,000 - *
Alexander L. Kyman - - - 1,000 - *
Jerome P. Alpin 43,084 35,000 1.4 12,833 - *
Stephen R. Berry 7,050 6,000 * 1,050 - *
D. Lee Johnson 5,000 5,000 * 1,734 - *
All Directors and
Officers (11 Persons) 1,350,626 228,300 40.4 1,170,675 17,500 37.2
OTHER 5% BENEFICIAL OWNERS (4)
Dimensional Fund Advisors Inc. 179,112 - 5.8 183,412 - 5.9
1299 Ocean Avenue, Ste. 850
Santa Monica, CA 90401
- -------------------------
* Denotes less than 1%.
Except as otherwise indicated, each person shown in the above table has sole
voting and dispositive power over the Class A or Class B common stock or
options.
(1) The address for each director and officer is c/o DEP Corporation, 2101 East
Via Arado, Rancho Dominguez, California 90220-6189.
(2) Includes options exercisable on October 15, 1996 or within 60 days
thereafter.
(3) Includes 400,000 shares of Class A common stock held in the Berglass 1995
Irrevocable Trust dated June 27, 1995 for which Mrs. Berglass is the
Trustee.
(4) Based solely upon the information delivered to the Company by such
beneficial owners. Dimensional Fund Advisors Inc. ("Dimensional"), a
registered investment advisor, is deemed to have beneficial ownership of
179,112 shares of Class A common stock and 183,412 shares of Class B common
stock as of June 30, 1996, all of which shares are held in portfolios of
DFA Investment Dimensions Group Inc., a registered open-end investment
company, or in series of The DFA Investment Trust Company, a Delaware
business trust, or the DFA Group Trust and the DFA Participation Group
Trust, investment vehicles for qualified employee benefit plans, all of
which Dimensional serves as investment manager. Voting power with respect
to certain of such shares is shared with persons who are officers of
Dimensional. Dimensional disclaims beneficial ownership of all such
shares.
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
34
PART IV
ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Schedules and Exhibits.
1. The financial statements listed in Item 8 above are incorporated
herein by this reference.
2. The financial schedule listed in Item 8 above is incorporated herein
by this reference. Schedule I is not listed because it is not
required.
3. Exhibit 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 (10)
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 (8)
3.5 Bylaws (8)
3.6 Certificate of Amendment to The Certificate
of Incorporation (10)
10.1 Profit Sharing Plan for Employees of
Dep
3. Exhibit
Number Title
------- -----
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 (10)
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 (8)
3.5 Bylaws (8)
3.6 Certificate of Amendment to The Certificate
of Incorporation (10)
10.1 Profit Sharing Plan for Employees of
DEP Corporation as of August 1, 1989 (4)
10.2 1983 Stock Option Plan, as amended (3) *
10.3 1988 Director and Officer Stock Option
Plan, as amended (3) *
10.4 1992 Stock Option Plan (6) *
35
3
Exhibit Sequential
Number Title Page Number
-------- ------ -----------
10.5 Stock Target Ownership Plan (7) *
10.6 Fiscal Year 1996 Bonus Arrangement for 63
Certain Executive Officers *
10.7 Lease Agreement relating to the Company's
California warehouse (3)
10.8 401(k) Plan for Employees of Dep Corporation (6) *
10.9 Form of Officers and Directors
Indemnification Agreement (8)
10.10 Dep Corporation Retention and Severance Plan (9) *
10.11 Form Change in Control Executive Severance
Agreement (9) *
10.12 Form Change in Control Executive Retention
Bonus Agreement (9) *
10.13 Form of Term Loan Agreement, dated as of
November 4
Exhibit
Number Title
------ -----
10.5 Stock Target Ownership Plan (7) *
10.6 Fiscal Year 1996 Bonus Arrangement for
Certain Executive Officers * **
10.7 Lease Agreement relating to the Company's
California warehouse (3)
10.8 401(k) Plan for Employees of DEP Corporation (6) *
10.9 Form of Officers and Directors
Indemnification Agreement (8)
10.10 DEP Corporation Retention and Severance Plan (9) *
10.11 Form Change in Control Executive Severance
Agreement (9) *
10.12 Form Change in Control Executive Retention
Bonus Agreement (9) *
10.13 Form of 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 (10)
10.14 Form of Warrant Agreement among the Company and
Warrant Holders dated as of November 4, 1996 (10)
10.15 Form of Release Agreement dated as of November 4,
1996 by and among the Company and the Lenders
named therein. (10)
11 Computation of Per Share Earnings **
21.1 Subsidiaries **
4
1996 (10)
10.15 Form of Release Agreement dated as of November 4,
1996 by and among the Company and the Lenders
named therein. (10)
11 Computation of Per Share Earnings 64
21.1 Subsidiaries 65
36
Exhibit Sequential
Number Title Page Number
-------- ------ -----------
23.1 Consent of Independent Auditors 66
27 Financial Data Schedule 675
Exhibit
Number Title
------- -----
23.1 Consent of Independent Auditors
27 Financial Data Schedule **
(1) Incorporated by reference to Exhibit 3.1 to the Company's Annual
Report on Form 10-K for the year ended July 31, 1988.
(2) Incorporated by reference to Exhibit 4 to the Company's Current
Report on Form 8-K filed on December 15, 1992.
(3) Incorporated by reference to Exhibits 10.2, 10.3, 10.7 and 10.8 to
the Company's Annual Report on Form 10-K for the year ended July
31, 1992.
(4) Incorporated by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the year ended July 31, 1990.
(5) Incorporated by reference to Exhibit 2.1 to the Company's Current
Report on Form 8-K filed on August 6, 1993.
(6) Incorporated by reference to Exhibits 10.4 and 10.9 to the
Company's Annual Report on Form 10-K for the year ended July 31,
1993.
(7) Incorporated by reference to Exhibits 3.3, 10.5 and 21.1 to the
Company's Annual Report on Form 10-K for the year ended July 31,
1994.
(8) Incorporated by reference to Exhibits to the Company's Current
Report on Form 8-K filed on January 16, 1995.
(9) Incorporated by reference to Exhibits 10.17, 10.18, 10.19, 10.20
and 10.21 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.
(10) Incorporated by reference to Exhibits 2.1, 3.1, 10.1, 10.2 and
10.3 to the Company's Current Report on Form 8-K filed on November
7, 1996.
* Management contract or compensatory plan.
** Previously filed under original Form 10-K on November 13, 1996.
(b) Reports on Form 8-K.
None
37None.
5
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the results of their operations
and their cash flows for each of the years in the three-year period ended
July 31, 1996, 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 20, 1996, except for Notes 1,
15 and 16, which date is October 23, 1996
38
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
July 31,
-----------------------------
1 9 9 6 1 9 9 5
------------- ----------
Assets
Current assets:
Cash and cash equivalents.................................................. $11,118,000 $ 4,611,000
Accounts receivable, less allowance for doubtful accounts
of $387,000 in 1996 and $478,000 in 1995.............................. 15,750,000 18,811,000
Inventories ............................................................... 11,999,000 13,071,000
Income taxes receivable.................................................... - 1,779,000
Deferred income taxes...................................................... - 188,000
Other current assets ...................................................... 3,339,000 2,275,000
---------- ----------
Total current assets..................................................... 42,206,000 40,735,000
Property and equipment, net.................................................. 14,086,000 15,423,000
Intangibles, net............................................................. 32,651,000 34,156,000
Other assets................................................................. 895,000 3,590,000
---------- ----------
$89,838,000 $93,904,000
---------- ----------
---------- ----------
Liabilities and Stockholders' Equity
Current liabilities:
Liabilities not subject to compromise:
Current portion of long-term debt.......................................... $ 144,000 $61,100,000
Accrued expenses........................................................... 9,563,000 7,920,000
Accounts payable .......................................................... 3,211,000 7,397,000
---------- ----------
Total current liabilities................................................ 12,918,000 76,417,000
Liabilities subject to compromise............................................ 67,783,000 -
Long-term debt, net of current portion....................................... 3,597,000 3,744,000
Other non-current liabilities................................................ 2,258,000 2,516,000
---------- ----------
Total liabilities........................................................ 86,556,000 82,677,000
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; authorized 14,000,000
shares; issued and outstanding 3,232,559 at July 31, 1996
and 1995.............................................................. 32,000 32,000
Class B common stock, par value $.01; authorized 7,000,000
shares; issued and outstanding 3,249,581 at July 31, 1996
and 3,232,340 at July 31, 1995....................................... 32,000 32,000
Additional paid-in capital................................................. 12,141,000 12,126,000
Retained earnings (deficit)................................................ (7,743,000) 215,000
Foreign currency translation adjustment.................................... (175,000) (173,000)
---------- ----------
4,287,000 12,232,000
Less treasury stock, at cost, 115,500 shares each of Class A
and Class B common stock................................................. (1,005,000) (1,005,000)
---------- ----------
Total stockholders' equity............................................... 3,282,000 11,227,000
---------- ----------
$89,838,000 $93,904,000
---------- ----------
---------- ----------
Subsequent event (Notes 1 and 16)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
39
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JULY 31,
-----------------------------------------------
1 9 9 6 1 9 9 5 1 9 9 4
---------- ----------- ----------
Net sales................................................... $119,088,000 $127,689,000 $138,331,000
Cost of sales............................................... 45,022,000 47,495,000 50,685,000
------------ ------------ ------------
Gross profit................................................ 74,066,000 80,194,000 87,646,000
Selling, general and administrative......................... 70,986,000 78,728,000 88,525,000
Write-down in value of assets............................... - 25,166,000 -
------------ ------------ ------------
Income (loss) from operations............................... 3,080,000 (23,700,000) (879,000)
Other expenses (income):
Interest expense, net..................................... 7,120,000 6,177,000 4,578,000
Other expense (income).................................... 23,000 (54,000) (84,000)
------------ ------------ ------------
7,143,000 6,123,000 4,494,000
------------ ------------ ------------
Loss before reorganization items and
income tax credits........................................ (4,063,000) (29,823,000) (5,373,000)
Reorganization items....................................... 3,895,000 - -
------------ ------------ ------------
Loss before income tax credits............................. (7,958,000) (29,823,000) (5,373,000)
Income tax credits......................................... - (2,865,000) (1,790,000)
---------- ----------- ----------
Net loss.................................................... $( 7,958,000) $(26,958,000) $( 3,583,000)
------------ ------------ ------------
------------ ------------ ------------
Net loss per share.......................................... $ (1.27) $ (4.32) $ (0.57)
------------ ------------ ------------
------------ ------------ ------------
Weighted average shares outstanding......................... 6,250,368 6,244,106 6,250,239
------------ ------------ ------------
------------ ------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
40
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JULY 31, 1996, 1995 AND 1994
Foreign
Class A Class B Additional Retained currency Treasury stock,
common common paid-in earnings/ translation at cost
stock stock capital (deficit) adjustment (Class A and B)
-------- --------- ----------- ------------ ------------ -----------------
Balance at July 31, 1993 $32,000 $32,000 $12,047,000 $30,756,000 $(222,000) $(1,005,000)
Cumulative translation adjustment 8,000
Issuance of stock 90,000
Net loss for the year (3,583,000)
-------- --------- ----------- ------------ ------------ -----------------
Balance at July 31, 1994 32,000 32,000 12,137,000 27,173,000 (214,000) (1,005,000)
Cumulative translation adjustment 41,000
Adjustment to stock issuance (11,000)
Net loss for the year (26,958,000)
-------- --------- ----------- ------------ ------------ -----------------
Balance at July 31, 1995 32,000 32,000 12,126,000 215,000 (173,000) (1,005,000)
Cumulative translation adjustment (2,000)
Issuance of stock 15,000
Net loss for the year (7,958,000)
-------- --------- ----------- ------------ ------------ -----------------
Balance at July 31, 1996 $32,000 $32,000 $12,141,000 $(7,743,000) $(175,000) $(1,005,000)
-------- --------- ----------- ------------ ------------ -----------------
-------- --------- ----------- ------------ ------------ -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
41
DEP CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended July 31,
-----------------------------------------------
1996 1995 1994
------------- -------------- --------------
Operating Activities:
Net loss.......................................................................... $ (7,958,000) $ (26,958,000) $ (3,583,000)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization.............................................. 5,933,000 5,507,000 5,571,000
Write-down in value of assets.............................................. - 25,166,000 -
Provision for losses on accounts receivable................................ 195,000 504,000 31,000
Deferred income taxes ..................................................... (70,000) (1,783,000) 342,000
Loss on sale of assets..................................................... 9,000 90,000 89,000
Changes in operating assets and liabilities, net of
effects from the acquisition:
Accounts receivable ....................................................... 2,867,000 (2,540,000) 395,000
Inventories ............................................................... 1,072,000 894,000 521,000
Income taxes receivable.................................................... 1,779,000 1,401,000 (818,000)
Other assets............................................................... (1,064,000) 1,331,000 (1,523,000)
Accrued expenses........................................................... 3,011,000 701,000 (1,260,000)
Accounts payable........................................................... 2,779,000 370,000 1,397,000
------------- -------------- --------------
Net cash provided by operating activities......................................... 8,553,000 4,683,000 1,162,000
------------- -------------- --------------
Investing Activities:
Purchases of property and equipment........................................ (378,000) (716,000) (1,643,000)
Acquisition of trademarks.................................................. - (200,000) (45,746,000)
Proceeds from sale of property and equipment............................... - - 21,000
Proceeds from sale of trademarks........................................... - 435,000 1,642,000
Other ..................................................................... (28,000) (112,000) (658,000)
------------- -------------- --------------
Net cash used in investing activities............................................. (406,000) (593,000) (46,384,000)
------------- -------------- --------------
Financing Activities:
Proceeds (reductions) from lines of credit and long-term debt................. (1,653,000) 42,000 45,120,000
Other......................................................................... 15,000 (487,000) -
------------- -------------- --------------
Net cash provided by (used in) financing activities............................... (1,638,000) (445,000) 45,120,000
------------- -------------- --------------
Increase (decrease) in cash and cash equivalents.................................. 6,509,000 3,645,000 (102,000)
Effect of exchange rate changes on cash........................................... (2,000) 19,000 (13,000)
Cash and cash equivalents at beginning of year.................................... 4,611,000 947,000 1,062,000
------------- -------------- --------------
Cash and cash equivalents at end of year.......................................... $ 11,118,000 $ 4,611,000 $ 947,000
------------- -------------- --------------
------------- -------------- --------------
Supplemental disclosure of cash flow information:
Cash paid (received) during the year for:
Interest, net................................................................. $ 4,816,000 $ 6,357,000 $ 4,446,000
------------- -------------- --------------
------------- -------------- --------------
Income tax refunds............................................................ $ (1,960,000) $ (2,546,000) $ (1,189,000)
------------- -------------- --------------
------------- -------------- --------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS.
42
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
NOTE 1. REORGANIZATION:
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"). None of the Company's foreign-based subsidiaries were part of the
chapter 11 filing.
By its terms, the Plan of Reorganization becomes effective (the
"Effective Date") on the first business day that is at least ten days after
the Bankruptcy Court order confirming the Plan of Reorganization is entered
and on which no stay of such order is then in effect. On October 23, 1996,
the Bankruptcy Court entered its order confirming the Plan of Reorganization.
Accordingly, the Effective Date of the Plan of Reorganization is November 4,
1996.
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. On May 8, 1996, July 11, 1996 and August 23, 1996, the
Company filed amended plans of reorganization and related disclosure
statements with the Bankruptcy Court. On September 9, 1996, the Bankruptcy
Court approved as adequate the Disclosure Statement, thereby enabling the
Company to solicit votes on the Plan of Reorganization from the Company's
secured lenders (collectively, the "Lender Group") and stockholders. From
the Filing Date until the Effective Date, 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 were stayed and have been 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
------------
------------
Among other things, the Plan of Reorganization provides that the Company
will repay approximately $62,000,000 in long-term secured indebtedness held
by the Lender Group, plus interest at the prime rate plus 2%, which
indebtedness matures July 31, 2002. The Plan of Reorganization further
provides: (i) that on the Effective Date, the Lender Group will receive
$150,000 in cash to satisfy certain post-petition interest claims, 542,488
shares of the Company's common stock, and warrants to purchase an additional
330,050 shares of common stock at a price equal to the average of the last
reported sales price for the Company's common stock on each of the 20
consecutive trading days following the Effective Date, and (ii) for
satisfaction of unsecured creditor claims, plus 5% interest, payable in
monthly installments, commencing
43
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
November 1996 and continuing through March 15, 1998. Additionally, the
Company's existing Class A and Class B common stock, including those shares
to be issued to the Lender Group, will be reclassified as one class of common
stock having the same voting rights, preferences and privileges. Finally,
the Plan of Reorganization provides for the Company to pledge to the Lender
Group any net cash proceeds derived by the Company in connection with the
litigation between the Company and S.C. Johnson and Son, Inc. ("S.C.
Johnson") and affiliates, described below. (See "Note 15 of the Notes to
Consolidated Financial Statements.")
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
COMPANY
The Company develops, manufactures, distributes and markets hair, skin,
oral and other personal care products. The Company's products are primarily
sold by drug, food and mass merchandise stores.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of DEP
Corporation, its wholly-owned subsidiaries and its China joint venture. All
significant intercompany balances and transactions have been eliminated.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities in the balance sheets of foreign subsidiaries
whose functional currency is other than the United States dollar are
translated at year-end exchange rates. Translation gains and losses are not
included in determining net income but are accumulated in a separate
component of stockholders' equity. Foreign currency transaction gains and
losses generally are included in determining net income.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is
determined on the first-in, first-out method.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is provided by
the use of the straight-line method for financial accounting purposes, while
accelerated methods are used for income tax purposes.
RECOGNITION OF REVENUES AND EXPENSES
44
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
Revenues from the sale of the Company's products are recognized at the
time of shipment. Related promotional allowances granted to retailers are
recognized at the time of sale. Certain trade and consumer promotion costs
included in selling, general and administrative expenses in the consolidated
statements of income are accrued monthly.
IMPAIRMENT ACCOUNTING
In fiscal 1995 the Company adopted the provisions of Statement of
Financial Accounting Standards No. 121, "Accounting For The Impairment Of
Long-Lived Assets And For Long-Lived Assets To Be Disposed Of" ("FASB 121").
The adoption of FASB 121 had no material impact on the impairment write-down
of the Agree and Halsa assets described herein.
INTANGIBLES
Intangible assets consist primarily of goodwill, trademarks, non-compete
agreements and customer lists and are carried at cost less accumulated
amortization. The Company assesses the recoverability of these intangible
assets by determining whether the amortization of the balance over their
remaining life can be recovered through undiscounted future operating cash
flows of the acquired assets. Costs are amortized over the estimated useful
lives of the related assets (5 - 40 years). Amortization expense charged to
operations for fiscal years ended July 31, 1996, 1995 and 1994 was
$1,510,000, $2,430,000, and $2,669,000, 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 fiscal 1995 the
Company revised its future forecasts which resulted in a significant
reduction in projected future cash flows of the product lines. The Company
determined that its projected results for Agree and Halsa would not support
the future amortization of the remaining intangible assets related to Agree
and Halsa. As part of its analysis, the Company engaged the services of an
independent valuation consultant to assist the Company in the determination
of the fair market value of the Agree and Halsa intangible assets. Based on
the results of the valuation, management concluded that the fair value of the
intangible assets of Agree and Halsa was approximately $12,500,000, and
wrote-down the carrying value of such intangibles in April 1995 by
$24,718,000. (See "Note 15 of the Notes to Consolidated Financial
Statements.")
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred.
The amounts charged for years ended July 31, 1996, 1995 and 1994 were
$661,000, $750,000, and $935,000, respectively.
45
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
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 would be issued upon
exercise of stock options has been reduced by the number of shares that could
have been purchased from the proceeds using the average of the market price
of the Company's common stock.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid investments with a maturity of
three months or less when purchased.
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 because of the short maturity of these items.
Except for the liability fees subject to compromise, which are governed by
the Company's Chapter 11 Case (see "Note 1 of the Notes to Consolidated
Financial Statements"), in managements opinion, the carrying values of the
Company's other debt instruments, principally mortgages, approximate the fair
values, of similar instruments with similar maturities.
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.
STOCK COMPENSATION
Statement of Financial Accounting Standards No. 123 "Accounting for
Stock-Based Compensation" (SFAS 123), issued in October 1995 and effective
for fiscal years beginning after December 15, 1995, encourages, but does not
require, a fair-value-based method of accounting for employee stock options
or similar equity instruments. SFAS 123 allows a company to elect to
continue to measure compensation cost under Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APBO No. 25), but
requires pro forma disclosures of net earnings and earnings per share as if
the fair-value-based method of accounting had been applied. The Company
plans to adopt SFAS 123 in fiscal 1997 and anticipates that it will
46
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
continue to elect to continue to measure compensation costs under APBO No.
25, and will comply with the pro forma disclosure requirements. Management
believes the adoption of SFAS 123 will not have a material impact on the
Company's financial position or results of operations.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 and 1994 amounts to
conform to the 1996 presentation.
NOTE 3. INVENTORIES:
The components of inventories were:
1996 1995
----------- -------------
Raw materials $ 4,650,000 $ 4,233,000
Finished goods 7,349,000 8,838,000
----------- -------------
$11,999,000 $13,071,000
----------- -------------
----------- -------------
NOTE 4. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
1996 1995
------------ -------------
Land $ 1,290,000 $ 1,290,000
Building and improvements 7,911,000 7,908,000
Machinery and equipment 13,696,000 13,558,000
Office furniture and equipment 7,199,000 7,091,000
Construction in process 157,000 88,000
Other 258,000 248,000
------------ -------------
30,511,000 30,183,000
Less accumulated depreciation 16,425,000 14,760,000
------------ -------------
$14,086,000 $15,423,000
------------ -------------
------------ -------------
47
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
NOTE 5. INTANGIBLES:
Intangibles consisted of the following:
1996 1995
----------- ------------
Goodwill $23,365,000 $23,365,000
Trademarks 16,595,000 16,593,000
Other 5,069,000 5,067,000
----------- ------------
45,029,000 45,025,000
Less accumulated amortization 12,378,000 10,869,000
----------- ------------
$32,651,000 $34,156,000
----------- -----------
----------- -----------
NOTE 6. ACCRUED EXPENSES:
Accrued expenses consisted of the following:
1996 1995
----------- -----------
Advertising and promotional
expenses $3,928,000 $3,377,000
Compensation related 1,002,000 1,019,000
Freight 716,000 604,000
Professional fees 1,987,000 460,000
Other 1,930,000 2,460,000
----------- -----------
$9,563,000 $7,920,000
----------- -----------
----------- -----------
NOTE 7. LONG-TERM DEBT:
1996 1995
----------- -----------
Term loan $ - $35,969,000
Working capital advances - 25,000,000
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 3,684,000 3,780,000
Other 57,000 95,000
----------- -----------
3,741,000 64,844,000
Less current portion 144,000 61,100,000
----------- -----------
$3,597,000 $ 3,744,000
----------- -----------
----------- -----------
The 1995 term loan related to the Revolving Credit and Term Loan
Agreement, as amended, (the "Bank Facility") with a group of seven banks (the
"Bank Group"), in conjunction with the acquisition of the Agree and Halsa
brands. As management did not believe it had sufficient cash to pay a
required principal payment under the Bank Facility, the entire amount owing
under the Bank Facility at July 31, 1995 was classified as a current
obligation.
48
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
As described in Note 1 of the Notes to Consolidated Financial Statements,
the pre-petition principal and all of the interest owed to the Lender Group
at July 31, 1996 was reclassified as "liabilities subject to compromise."
(See "Note 16 of the Notes to Consolidated Financial Statements" which
includes a discussion of the terms of the new term loan.)
Interest expense charged to operations for fiscal years ended July 31,
1996, 1995 and 1994 was $7,120,000, $6,255,000, and $4,622,000, respectively.
Maturities of long-term debt for years ended July 31, as follows:
1997 $ 144,000
1998 128,000
1999 123,000
2000 135,000
2001 148,000
Thereafter 3,063,000
-----------
$3,741,000
-----------
-----------
NOTE 8. REORGANIZATION ITEMS:
Reorganization items consisted of the following:
1996
-----------
Professional fees $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 (115,000)
-----------
$3,895,000
-----------
-----------
NOTE 9. INCOME TAXES:
The summary of the income tax provision (credit) for federal and state
income taxes follows:
1996 1995 1994
------- ------------ ------------
Current:
Federal $ - $(1,807,000) $(2,027,000)
State - 31,000 (67,000)
------- ------------ ------------
- (1,776,000) (2,094,000)
Deferred:
Federal - (1,209,000) 406,000
State - 120,000 (102,000)
------- ------------ ------------
- (1,089,000) 304,000
------- ------------ ------------
Income taxes (credit) $ - $(2,865,000) $(1,790,000)
------- ------------ ------------
------- ------------ ------------
49
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995, AND 1994
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:
1996 1995 1994
-------- ------- -------
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 (2.0) (4.5) (3.1)
Earnings of foreign sales
corporation not taxable - (.5) (1.6)
Intangibles amortization 2.7 .7 4.1
Increase in valuation allowance 37.4 28.6 -
Other, net (4.1) .1 1.3
-------- ------- -------
Effective tax rate - % (9.6)% (33.3)%
-------- ------- -------
-------- ------- -------
The components of the deferred tax provision (credit) resulting from
temporary differences between the recognition of income for financial and tax
reporting purposes were as follows:
1996 1995 1994
---------- ------------ ----------
Depreciation and amortization $ 614,000 $(9,344,000) $ 786,000
Valuation allowance 2,941,000 8,517,000 -
Charitable contributions (47,000) (156,000) (130,000)
Coupon redemption (113,000) 127,000 (67,000)
Deferred charges (81,000) 351,000 (102,000)
Net operating loss, capital loss
and tax credit carryforwards (3,006,000) (379,000) -
Inventory valuation 115,000 113,000 (165,000)
Other, net (423,000) (318,000) (18,000)
---------- ------------ ----------
$ - $(1,089,000) $ 304,000
---------- ------------ ----------
---------- ------------ ----------
50
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at July 31,
1996 and 1995, are as follows:
1996 1995
------------- ------------
Deferred tax assets:
Accounts receivable $ 89,000 $ 118,000
Inventory 236,000 308,000
Intangibles 8,810,000 9,310,000
Contribution carryforwards 468,000 422,000
Net operating loss, capital loss
and tax credit carryforwards 3,819,000 823,000
Accrued liabilities 353,000 437,000
------------- ------------
Total gross deferred tax assets 13,775,000 11,418,000
Valuation allowance (11,458,000) (8,517,000)
------------- ------------
2,317,000 2,901,000
Deferred tax liabilities:
Property and equipment, net (2,317,000) (2,447,000)
------------- ------------
Net deferred tax asset $ - $ 454,000
------------- ------------
------------- ------------
The net operating loss, capital loss and tax credit carryforwards expire
between 1998 and 2010.
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 also has a 1983 Stock Option Plan (the "1983
Plan"); however, no further options may be issued under such plan.
As of July 31, 1996, there were 451,150 and 55,000 stock options
outstanding under the 1992 Plan and 1983 Plan, respectively. The options
outstanding entitle the holders to purchase 418,150 shares of Class A common
stock and 88,000 shares of Class B common stock or as reclassified under the
Plan of Reorganization a total of 506,150 shares of DEP Common Stock.
Substantially all of the options outstanding are exercisable, in full, three
years after the date of grant.
51
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
A summary of activity in the Company's stock option plans is presented
below:
SHARES PRICE
-------- -------------
Outstanding at July 31, 1993 597,846 $2.75 - 12.38
Granted 130,100 2.75 - 5.50
Exercised (8,275) 2.75
Canceled or expired (43,250) 2.75 - 9.88
-------- -------------
Outstanding at July 31, 1994 676,421 2.75 - 12.38
Granted 233,500 1.13 - 2.23
Canceled or expired (73,191) 2.75 - 12.38
-------- -------------
Outstanding at July 31, 1995 836,730 1.13 - 12.38
Granted 10,000 2.13
Canceled or expired (340,580) 1.13 - 9.88
-------- -------------
Outstanding at July 31, 1996 506,150 $1.13 - 12.38
-------- -------------
-------- -------------
1996 1995
-------- -------------
Exercisable 263,850 249,430
-------- -------------
-------- -------------
Available to be granted 173,964 52,189
-------- -------------
-------- -------------
The options exercisable at July 31, 1996 and 1995 were exercisable at price
ranges per share of $2.23 to $12.38 and $2.75 to $12.38, respectively.
MANAGEMENT INCENTIVE PLANS
In January 1988, the stockholders approved the 1988 Directors and
Officers Stock Option Plan which allows directors and officers to elect to
receive stock options in 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. At July 31, 1996 there
were no outstanding options. At July 31, 1995 there were outstanding options
to acquire 1,643 shares of Class A common stock and 1,643 shares of Class B
common stock.
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
52
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
maximum number of shares issuable under the 1993 Plan will be the lesser of
ten percent (10%) of the total number of shares of common stock outstanding
at the date of grant or 2,000,000 shares. The 1993 Plan expires October 27,
2003. At July 31, 1996 no executives were entitled to receive shares of
common stock. At July 31, 1995 there were three executives entitled to
receive an aggregate of 6,241 shares of Class B common stock.
DEFERRED COMPENSATION PLAN
In November 1995 the Company terminated its deferred compensation program
and paid out the benefits to the remaining participants with assets of the
program. The deferred compensation plan had enabled the Company's officers
and directors to defer up to 75% of their yearly total cash compensation. At
July 31, 1995, there were four participants in the program. The program was
not qualified under Section 401 of the Internal Revenue Code.
NOTE 11. RETIREMENT PLAN:
The Company maintains a profit sharing plan which covers employees who
are twenty and one-half years of age or older and have completed six months
of employment. The Company's Board of Directors determine the amount of each
year's contribution, if any, to such plan. The Company made no contribution
to the plan during the years ended July 31, 1996 and 1995. The Company's
contribution for the year ended July 31, 1994 was $100,000.
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 Company, in its discretion, to match
such contributions. The Company's contributions for the years ended July 31,
1996, 1995, and 1994 were $50,000, $53,000 and $61,000, respectively.
NOTE 12. COMMITMENTS:
At July 31, 1996, future minimum lease payments that have noncancelable
lease terms in excess of one year were as follows:
YEARS ENDING JULY 31, OPERATING LEASES
--------------------- ----------------
1997 $ 831,000
1998 744,000
1999 683,000
2000 49,000
2001 36,000
Thereafter 138,000
----------
Total minimum lease payments $2,481,000
----------
----------
53
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
Rent expense for the years ended July 31, 1996, 1995 and 1994 was
$945,000, $919,000, and $880,000, respectively.
NOTE 13. RELATED-PARTY TRANSACTIONS:
There were no related party transactions for the years ended July 31,
1996 and 1995.
For the year ended July 31, 1994 selling, general and administrative
expenses included $476,000, paid or accrued to a legal firm affiliated with
an individual who served as a director of the Company. Such individual is no
longer a member of the Board of Directors.
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:
1996 1995 1994
------------ ------------ ------------
Net Sales:
United States $100,245,000 $108,016,000 $123,056,000
Foreign 18,843,000 19,673,000 15,275,000
------------ ------------ ------------
Total $119,088,000 $127,689,000 $138,331,000
------------ ------------ ------------
------------ ------------ ------------
Income (loss) before income taxes (credit):
United States $ (6,984,000) $(19,908,000) $ (7,531,000)
Foreign (974,000) (9,915,000) 2,158,000
------------ ------------ ------------
Total $ (7,958,000) $(29,823,000) $ (5,373,000)
------------ ------------ ------------
------------ ------------ ------------
Identifiable assets:
United States $ 74,642,000 $ 78,740,000 $ 97,417,000
Foreign 15,196,000 15,164,000 24,678,000
------------ ------------ ------------
Total $ 89,838,000 $ 93,904,000 $122,095,000
------------ ------------ ------------
------------ ------------ ------------
54
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
During 1996, 1995 and 1994, sales to Wal-Mart Stores, Inc. were 17%, 16%
and 19%, 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. (See
"Note 1 of the Notes to Consolidated Financial Statements".)
The nature of the Chapter 11 Case is to have all claims against and
interests in the Company resolved. Accordingly, during the Chapter 11 Case,
the Bankruptcy Court ordered that any entity desiring to participate in any
distributions under a plan of reorganization must either have been previously
properly scheduled by the Company or filed a proof of claim with the
Bankruptcy Court on or before May 28, 1996. For bankruptcy purposes, a valid
and enforceable claim is referred to as an "allowed claim." During the
Chapter 11 Case, the Company filed objections to certain proofs of claim,
which objections will be resolved by the Bankruptcy Court.
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 (the "Principal Case") 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. The complaint requested rescission of the
transaction, actual and punitive damages in an amount to be determined, and
other relief. In January 1996 the District Court issued a partial summary
judgment dismissing the claims for fraud, rescission and punitive damages and
permitting the Company to proceed under breach of contract. The Principal
Case, scheduled for trial in September 1996, has been stayed pending the
outcome of the fraudulent transfer action, described below, that the Company
filed against S.C. Johnson in June 1996 which is pending before the
Bankruptcy Court.
In April 1994, S.C. Johnson filed a libel action against the Company in
Wisconsin and S.C. Johnson's subsidiary ("SCJ Canada") filed a lawsuit
against the Company in Ontario, Canada. The Company previously has demanded
that its insurance carriers settle the libel action within coverage
limitations (in excess of $10,000,000), but to-date no settlement has been
55
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
reached. S.C. Johnson has filed a proof of claim in the Bankruptcy Court
asserting in excess of $12,000,000 on account of the libel action. The
Canadian lawsuit (which has been stayed pending the Chapter 11 Case) alleges
that the Company is indebted to SCJ Canada in the amount of $1,400,000 for
goods sold and delivered, plus interest and costs. Both S.C. Johnson and SCJ
Canada have filed proofs of claim asserting over $1,400,000 on account of the
Canadian lawsuit.
On June 17, 1996, the Company filed an "Objection and Counterclaim" in
the Bankruptcy Court in response to these claims and others asserted by S.C.
Johnson. In its Objection and Counterclaim, the Company maintains that it
has no liability whatsoever with respect to the libel matter. The Company
also maintains that pursuant to terms of the relevant agreements, the Company
did not enter into, and is not obligated on, any contract to purchase goods
with SCJ Canada; all relevant agreements were entered into between the
Company and S.C. Johnson, as to which the Company holds claims far in excess
of $1,400,000, plus interest and costs.
S.C. Johnson also has filed a proof of Claim asserting that under the
relevant agreements entered into between the Company and S.C. Johnson
relating to the Agree and Halsa acquisition, S.C. Johnson is the "prevailing
party" as a result of the District Court's dismissal of the Company's claims
for fraud, rescission and punitive damages, and that S.C. Johnson is entitled
to recovery of attorneys' fees in excess of $1,500,000. In its Objection and
Counterclaim, the Company disputes this contention and maintains that the
Company will be entitled to recover its fees, costs and damages by virtue of
S.C. Johnson's breach of the relevant agreements.
In its Objection and Counterclaim, the Company also asserts counterclaims
against S.C. Johnson and SCJ Canada based upon breach of contract and
Bankruptcy Code Sections 544(b) and 550(a)(1) and applicable state fraudulent
transfer law that (a) the Company received less than reasonably equivalent
value in the Agree and Halsa acquisition; (b) the Company (i) was engaged or
was about to engage in a business or a transaction for which the remaining
assets of the Company were unreasonably small in relation to the business or
transaction, and (ii) the Company reasonably should have believed that as a
result of the acquisition the Company would incur debts beyond its ability to
pay as they become due; and (c) therefore, the Company may recover for the
benefit of the estate, any transfer to S.C. Johnson or its affiliates, or if
the Bankruptcy Court so orders, the value of such transfer. The Company
maintains that its counterclaims against S.C. Johnson and its affiliates are
well in excess of any claims of S.C. Johnson and its affiliates.
On or about August 1, 1996, S.C. Johnson and SCJ Canada in the Bankruptcy
Court filed their "Answer and Counterclaim" to the Company's Objection and
Counterclaim. In its Answer and Counterclaim, S.C. Johnson and SCJ Canada
deny the Company's claims and assert that if the Company prevails on its
Objection and Counterclaim, the Company will be required to return any sums
recovered thereby on the grounds that the Company will have allegedly (i)
breached representations to S.C. Johnson, (ii) failed to pay the purchase
price under the purchase agreement, and (iii) made negligent
misrepresentations in connection with the transaction.
56
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
S.C. Johnson and SCJ Canada also asserted claims for setoff and recoupment on
account of their claims against the Company, and claims for attorneys' fees
and expenses in defending the Objection and Counterclaim. The Company
vigorously disputes the contentions contained in the Answer and Counterclaim.
On or about September 16, 1996, S.C. Johnson filed with the Bankruptcy
Court a motion for an order (i) dismissing that portion of the Company's
Objection and Counterclaim based upon breach of contract or, in the
alternative, staying or abstaining from the breach of contract counterclaim,
and (ii) transferring venue to the District Court on that portion of the
Company's Objection and Counterclaim based upon fraudulent transfer. The
Company has opposed S.C. Johnson's motion, contending that the Bankruptcy
Court should stay that portion of the Objection and Counterclaim based upon
breach of contract, pending the Bankruptcy Court's resolution of the
Company's fraudulent transfer counterclaims, and that the Bankruptcy Court
should deny the balance of the relief requested in S.C. Johnson's motion.
The Bankruptcy Court had scheduled a hearing on this motion for October 23,
1996, however, both parties agreed to continue such hearing for approximately
two weeks.
In addition, S.C. Johnson has filed a motion with the Bankruptcy Court
requesting that the Bankruptcy Court dismiss that portion of the Company's
Objection and Counterclaim against Johnson Canada based upon breach of
contract and fraudulent transfer, contending that the Objection and
Counterclaim fails to state a claim upon which relief can be granted. The
Company has opposed this motion, and the Bankruptcy Court has scheduled a
hearing thereon concurrent with the above referenced hearing.
A status conference in the fraudulent transfer action is tentatively
scheduled for December 4, 1996 before the Bankruptcy Court.
The projections accompanying the Company's Disclosure Statement included
in the Company's estimate of all allowed general unsecured claims a potential
allowed claim in the amount of $1,400,000, representing the approximate
potential liability to S.C. Johnson in respect of the above referenced claim
for goods delivered. The Company's projections did not include any other
potential claims of S.C. Johnson or its affiliates, or otherwise make
provision for the satisfaction of any such other claims of S.C. Johnson or
its affiliates. All told, S.C. Johnson and its affiliates have asserted
disputed claims against the Company in excess of $15,000,000, of which
approximately $12,000,000 is based upon S.C. Johnson's disputed libel claim
against the Company (which libel claim is in turn subject to the Company's
settlement demand previously made upon the Company's insurance carriers.)
The allowance, without offset or insurance coverage, of claims in favor of
S.C. Johnson and its affiliates in excess of $1,400,000 could have a
materially adverse effect on the Company's business operations and ability to
meet its obligations under the Plan of Reorganization. As noted above, the
Company vigorously disputes all claims asserted by S.C. Johnson and its
affiliates.
57
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
On September 17, 1996, Clinique Laboratories, Inc. filed a civil action
complaint against the Company, in the United States District Court, Southern
District of New York (96 Civ. 7045 (SAS)). The complaint alleged, among
other things, trademark infringement, copyright infringement, trademark and
trade dress dilution, and unfair competition related to the Company's test
market of a new skin care line of products under the name "basique simplified
skin care ("basique")." On October 10, 1996, the District Court issued a
preliminary injunction prohibiting the Company from selling basique as
currently labelled and requiring the Company to recall such product from
retailers. The preliminary injunction does not prohibit the Company from
using the basique name. However, it does require a change to the basique
trade dress. Sales of the basique products were in a limited test market at
the time of the preliminary injunction and the Company anticipates that the
total non-recoverable costs associated with the recall, including legal
expenses, will be approximately $600,000, which will be recognized during
fiscal year ending July 31, 1997.
NOTE 16. SUBSEQUENT EVENT:
As of August 20, 1996 the Company and the Lender Group agreed to a
Consensual Plan of Reorganization, which was the underlying basis to the
Credit Facility, and whose principal terms are contained in the Plan of
Reorganization. (See "Note 1 of the Notes to Consolidated Financial
Statements.")
The Credit Facility, among other things, provides the Company with
approximately $62,000,000 in long-term financing, with interest at the prime
rate plus two percent, maturing July 31, 2002. The Credit Facility 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 Credit Facility the Company is also obligated to pay the Lender
Group an additional $80,000 per month for a period of twelve months after the
Effective Date, in satisfaction of the Lender Group's professional fees and
expenses incurred during the chapter 11 process through July 31, 1996. At
July 31, 1996, the liability for such professional fees was classified in the
accrued liabilities in the consolidated balance sheet.
The annual principal payments due under the Credit Facility inclusive of
the 12 monthly professional fee payments for the years ended July 31, are as
follows:
1997 $ 1,375,000
1998 1,400,000
1999 3,500,000
2000 5,250,000
2001 6,750,000
Thereafter $43,654,000
58
DEP CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JULY 31, 1996, 1995 AND 1994
The Credit Facility also contains various financial covenant
requirements, including minimum current and fixed charge coverage ratios,
maximum capital expenditures and leverage ratios.
The Plan of Reorganization further provides, that on the Effective Date,
the Lender Group will receive $150,000 in cash to satisfy certain
post-petition interest claims, 542,488 shares of common stock and warrants to
purchase an additional 330,050 shares of common stock at a price equal to the
average of the last reported sales price for the Company's Common Stock on
each of the 20 consecutive trading days following the Effective Date.
59
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.
November 13, 1996 DEP CORPORATION
By /s/ Robert Berglass
-------------------------------
Robert Berglass, President
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
- --------- ----- ----Date: March 19, 1997 DEP CORPORATION
/s/Robert Berglass
-----------------------------------
Chairman of the Board November 13, 1996
- ---------------------- and President
Robert Berglass
(Principal Executive Officer)
Date: March 19, 1997 /s/Grant W. Johnson
-----------------------------------
Senior Vice President and
November 13, 1996
- ---------------------- Chief Financial Officer and
Grant W. Johnson
Director, (Principal Financial
and Accounting Officer)
/s/ Judith R. Berglass Senior Vice President November 13, 1996
- ---------------------- Corporate Development
Judith R. Berglass Secretary and Director
/s/ Alexander L. Kyman Director November 13, 1996
- ----------------------
Alexander L. Kyman
/s/ Michael Leiner Director November 13, 1996
- ----------------------
Michael Leiner
/s/ Philip I. Wilber Director November 13, 1996
- ----------------------
Philip I. Wilber
606
DEP CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II (1 of 2)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- --------- ---------- --------- --------
ADDITIONS
--------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------------------------------- ------------ ------------- ----------- ------------- -------------
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 $1,626,000
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 $1,985,000
YEAR END JULY 31, 1994
ALLOWANCE FOR DOUBTFUL ACCOUNTS $266,000 $18,000 0 * $(22,000) $262,000
ALLOWANCE FOR CUSTOMER CHARGEBACKS 1,112,000 ** $653,000 0 $1,765,000
* AMOUNTS WRITTEN OFF, NET OF RECOVERIES
** NET ACTIVITY
61
DEP CORPORATION AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
SCHEDULE II (2 of 2)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- --------- ---------- --------- --------
ADDITIONS
--------------------------
(1) (2)
BALANCE AT CHARGED TO CHARGED TO
BEGINNING OF COSTS AND OTHER ACCOUNTS DEDUCTIONS BALANCE AT END
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE OF PERIOD
- ----------------------------------- ------------ ------------- ----------- ------------- -------------
YEAR END JULY 31, 1996
INVENTORY VALUATION $931,000 $250,000 0 ** $(222,000) $959,000
YEAR END JULY 31, 1995
INVENTORY VALUATION $1,222,000 $596,000 0 ** $(887,000) $931,000
YEAR END JULY 31, 1994
INVENTORY VALUATION $874,000 $1,192,000 0 ** $(844,000) $1,222,000
** AMOUNTS WRITTEN OFF AGAINST RESERVE
62
7
EXHIBIT INDEX
Description
Exhibit 23.1 Consent of Independent Auditors
7