1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED OCTOBER 31, 1997 COMMISSION FILE #0-12862 DEP CORPORATION A DELAWARE CORPORATION - I.R.S. NO. 95-2040819 2101 EAST VIA ARADO, RANCHO DOMINGUEZ, CA 90220 (310) 604-0777 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 company was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock, exclusive of treasury stock, as of the latest practicable date. Outstanding at Class October 26, 1997 - ---------------------------- ---------------- COMMON STOCK, $.01 PAR VALUE 6,876,140 1 2 INDEX PART I. FINANCIAL INFORMATION PAGE ---- ITEM 1. FINANCIAL STATEMENTS: CONSOLIDATED CONDENSED BALANCE SHEETS - 3 October 31, 1997 and July 31, 1997 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS - 4 Three Month Periods ended October 31, 1997 and 1996 CONSOLIDATED CONDENSED STATEMENTS OF RETAINED 5 DEFICIT AND ADDITIONAL PAID-IN CAPITAL - Three Month Period Ended October 31, 1997 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS - 6 Three Month Periods Ended October 31, 1997 and 1996 NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9 CONDITION AND RESULTS OF OPERATIONS PART II. OTHER INFORMATION SIGNATURES 13 EXHIBIT INDEX 14 2 3 DEP CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED) October 31, July 31, ASSETS 1997 1997 ------------ ------------ Current assets: Cash and cash equivalents ............................ $ 10,302,000 $ 11,788,000 Accounts receivable, net ............................. 15,073,000 16,218,000 Inventories at lower of cost (first-in, first-out) or market: Raw materials ...................................... 6,135,000 5,470,000 Finished goods ..................................... 8,627,000 7,526,000 ------------ ------------ 14,762,000 12,996,000 Other current assets ................................. 1,571,000 2,014,000 ------------ ------------ Total current assets ............................... 41,708,000 43,016,000 Property and equipment, net ........................... 12,700,000 12,822,000 Intangibles, net ...................................... 26,954,000 27,181,000 Other assets .......................................... 1,615,000 1,671,000 ------------ ------------ $ 82,977,000 $ 84,690,000 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion long-term debt ...................... $ 2,000,000 $ 1,853,000 Accrued expenses .................................... 6,624,000 6,854,000 Accounts payable .................................... 7,201,000 8,529,000 ------------ ------------ Total current liabilities .......................... 15,825,000 17,236,000 Long-term debt, net of current portion ................ 60,741,000 61,521,000 Other non-current liabilities ......................... 1,820,000 1,832,000 ------------ ------------ Total liabilities .................................. 78,386,000 80,589,000 Stockholders' equity: Preferred stock, par value $.01; authorized 3,000,000 shares, none outstanding ........................... -- -- Common Stock, par value $.01; authorized 15,000,000 shares; issued 7,107,140 shares .................... 71,000 71,000 Additional paid-in capital .......................... 13,397,000 13,397,000 Retained deficit .................................... (7,671,000) (8,181,000) Foreign currency translation adjustment ............. (201,000) (181,000) ------------ ------------ 5,596,000 5,106,000 Less: treasury stock, at cost, 231,000 shares of Common Stock .................................. (1,005,000) (1,005,000) ------------ ------------ 4,591,000 4,101,000 ------------ ------------ $ 82,977,000 $ 84,690,000 ============ ============ See notes to consolidated condensed financial statements 3 4 DEP CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended October 31, ---------------------------- 1997 1996 ------------ ------------ Net sales ................................... $ 25,814,000 $ 28,013,000 Cost of sales ............................... 9,605,000 10,788,000 ------------ ------------ Gross profit ................................ 16,209,000 17,225,000 Selling, general and administrative expenses ................... 14,113,000 17,041,000 ------------ ------------ Income from operations ...................... 2,096,000 184,000 Other income (expense): Interest, net ............................. (1,635,000) (1,959,000) Other ..................................... 49,000 11,000 ------------ ------------ (1,586,000) (1,948,000) ------------ ------------ Income (loss) before reorganization items and income taxes .............................. 510,000 (1,764,000) Reorganization items ........................ -- 299,000 ------------ ------------ Income (loss) before income taxes ........... 510,000 (2,063,000) Income taxes ................................ -- -- ------------ ------------ Net income (loss) ........................... $ 510,000 $( 2,063,000) ============ ============ Net income (loss) per share ................. $ 0.07 $( 0.33) ============ ============ Weighted average shares outstanding ......... 6,876,140 6,251,140 ============ ============ See notes to consolidated condensed financial statements 4 5 DEP CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF ADDITIONAL PAID-IN CAPITAL AND RETAINED DEFICIT THREE MONTHS ENDED OCTOBER 31, 1997 (UNAUDITED) Additional Retained Paid-in Capital Deficit --------------- ----------- Balance at beginning of period ............ 13,397,000 $(8,181,000) Net income ................................ -- 510,000 ---------- ----------- Balance at end of period .................. 13,397,000 $(7,671,000) ========== =========== See notes to consolidated condensed financial statements 5 6 DEP CORPORATION AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended October 31, --------------------------- Operating Activities: 1997 1996 ----------- ------------ Net income (loss) ................................... $ 510,000 $ (2,063,000) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization ..................... 708,000 845,000 Other ............................................. 28,000 51,000 Changes in operating assets and liabilities: Accounts receivable .............................. 1,103,000 2,532,000 Inventories ...................................... (1,775,000) (1,805,000) Other assets ..................................... 443,000 (362,000) Accounts payable ................................. (1,330,000) 1,490,000 Accrued expenses ................................. (234,000) 800,000 ----------- ------------ Net cash provided by (used in) operating activities . (547,000) 1,488,000 Investing Activities: Purchases of property and equipment ................. (269,000) (211,000) Other, net .......................................... (34,000) 64,000 ----------- ------------ Net cash used in investing activities ................ (303,000) (147,000) Financing Activities: Decrease in lines of credit and long-term debt, including change in current portion .............. (633,000) (35,000) ----------- ------------ Net cash used in financing activities ................ (633,000) (35,000) ----------- ------------ Increase (decrease) in cash and cash equivalents ..... (1,483,000) 1,306,000 Effect of exchange rate changes on cash .............. (3,000) 22,000 Cash and cash equivalents at beginning of period ..... 11,788,000 11,118,000 ----------- ------------ Cash and cash equivalents at end of period ........... $10,302,000 $ 12,446,000 =========== ============ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid (received) during the period for: Interest ......................................... $ 1,577,000 $ 626,000 =========== ============ Income tax payments (refunds) .................... $ -- $ (2,000) =========== ============ See notes to consolidated condensed financial statements 6 7 DEP CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1. GENERAL In the opinion of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring accruals) necessary to fairly present the financial position as of October 31, 1997, and the results of operations and statements of cash flows for the three month period ended October 31, 1997. The results of operations for the three month period ended October 31, 1997, are not necessarily indicative of the results to be expected for any other period or for the full year. These quarterly financial statements should be read in conjunction with the Company's audited financial statements contained in the annual report on Form 10-K for the year ended July 31, 1997. NOTE 2. EARNINGS (LOSS) PER SHARE Earnings (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 the exercise of stock options has been reduced by the number of shares that could have been purchased from the proceeds at the average market price of the Company's Common Stock. For the three month periods ended October 31, 1997 and 1996 there were no dilutive stock options. In February 1997, Statement of Financial Accounting Standards (SFAS) No. 128 "Earnings per Share" was issued and is effective for interim and annual reporting periods ending after December 15, 1997. SFAS No. 128 will require the presentation of Basic Earnings per Share and Diluted Earnings per Share in the Company's Consolidated Statements of Operations. Basic Earnings per Share represents income available to common shareholders divided by the weighted average number of common shares outstanding for the period. Diluted Earnings per Share is similar to the current presentation of fully diluted earnings per share. SFAS No. 128 requires restatement of all prior period earnings per share data presented, however, management believes the adoption of SFAS No. 128 will not have a material impact on the Company's financial position or results of operations. NOTE 3. ACCRUED EXPENSES Provisions for certain expenses, including coupon redemption and cooperative advertising, are based on full year assumptions. Such expenses are charged to operations in the year incurred and are included in the accompanying consolidated condensed financial statements based upon estimated annual sales. 7 8 NOTE 4. REORGANIZATION ITEMS Reorganization items consisted of the following: Three Months Ended October 31 -------------------------- 1997 1996 -------- --------- Professional fees $ -- $ 429,000 Interest income -- (130,000) -------- --------- $ -- $ 299,000 ======== ========= NOTE 5. RECLASSIFICATION Certain reclassifications have been made to the fiscal 1997 amounts to conform to the fiscal 1998 presentation. NOTE 6. NEW ACCOUNTING STANDARDS The Financial Accounting Standards Board has issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information." SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. SFAS No. 131 supersedes previous reporting requirements for reporting on segments of a business enterprise. These accounting standards are effective for periods beginning after December 15, 1997. The Company has not determined the impact, if any, of these new accounting standards. 8 9 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations Consolidated net sales for the three months ended October 31, 1997, were $25,814,000 compared to $28,013,000 for the same period in the prior year. The decrease related to lower unit volume of the Company's Personal Care Products, primarily the result of lower international sales. Domestic net sales of Personal Care Products for the three months ended October 31, 1997 declined by $253,000 from the previous year. Domestic net sales benefited from the roll-out of two, new, high margin product lines, LE SYSTEME and THEORIE, which offset generally lower sales of the remaining products. International net sales of Personal Care Products declined by $1,929,000 primarily as a result of the conversion of the Company's operations in Australia and Asia from direct sales to license arrangements whereby the Company records royalty income based upon a percentage of the licensees' sales. Such conversion accounted for $965,000, or 50%, of the current period's decline. In addition, international sales of AGREE and HALSA declined by $535,000. Gross profits for the three months ended October 31, 1997 were $16,209,000, or 63% of net sales, compared to $17,225,000, or 61% of net sales, in the prior year. The decrease in absolute dollars was due to the lower sales volume while the increase in percentage terms was the result of sales mix. In addition, the LE SYSTEME and THEORIE lines have higher gross margins than the Company's average. Selling, general and administrative expenses ("SG&A") for the three month periods ended October 31, 1997 and 1996 were $14,113,000 and $17,041,000, and as a percentage of net sales were 55% and 61%, respectively. In dollar terms, the lower SG&A of the current period was primarily due to lower variable expenses resulting from lower net sales. Variable expenses were also favorably impacted by the effects of lower off-invoice promotional allowances as a result of moderate price increases. In addition, there were lower legal and amortization expenses in the current period, and in the prior period SG&A included $600,000 of expenses related to the recall of a test market skin care line. The decrease in SG&A, as a percentage of net sales, was the result of lower promotional allowances and administrative expenses in the current period, and the non-recurring product recall expenses in the prior year's period. Operating income increased to $2,096,000 for the three months ended October 31, 1997, from $184,000 for the prior year, primarily as a result of the higher gross profits, lower promotional allowances and non-recurring product recall costs. For the three months ended October 31, 1997, net interest expense decreased to $1,635,000 from $1,959,000 in the comparable period of the prior year. The decrease was due to a lower average principal balance and a lower average interest rate. 9 10 There was no tax provision for the three months ended October 31, 1997 as a result of net operating losses which offset taxable income. For the three month period ended October 31, 1997, the Company recorded net income of $510,000, or $.07 per share, compared to a net loss of $2,063,000, or $.33 per share, in the prior year's period. The improved results of the current period were primarily due to higher gross margins, lower promotional allowances and lower interest expense in the current period, and non-recurring recall costs and reorganization expenses in the prior year's period. Liquidity and Capital Resources Working capital at October 31, 1997 and July 31, 1997 was $25,883,000 and $25,780,000, respectively, with current ratios of 2.6:1 and 2.5:1, respectively. The lower accounts receivable at October 31, 1997 is a reflection of the lower sales levels in the current quarter as compared to the fourth quarter of fiscal 1997. Inventory increased due to the build-up related to new products and first half promotional inventories. The decrease in accounts payable was primarily the result of the pay-down of pre-petition unsecured creditor claims which will continue through March 1998. Management believes that its cash and cash equivalents and cash flows from operations will be sufficient to enable it to meet its obligations for the next twelve months. The Company has from time to time engaged in discussions with third parties regarding the possible acquisition by one or more of such third parties of discrete portions of the Company's assets, and it has received indications of interest from time to time from third parties interested in acquiring all of the Company's stock or assets. The discussions have been preliminary in nature and no agreements regarding any such sale or sales have been reached, nor can any assurance be given that any agreements will be reached. Forward Looking Statements The Management's Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-Q contain forward looking statements that are based on management's current beliefs and assumptions about expectations, estimates, strategies and projections for the Company. Words such as "expects," "seeks," "anticipates," "intends," "plans," "believes," "estimates," and variations of such words and similar expressions are intended to identify such forward looking statements. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward looking statements. The Company undertakes no obligation to update publicly any forward looking statements whether as a result of new information, future events or otherwise. The risks, uncertainties and assumptions regarding forward looking statements include, but are not limited to, product demand and market acceptance risks; product development risks, such as delays or difficulties in developing, producing and marketing new products or line 10 11 extensions; the impact of competitive products, pricing and advertising; constraints resulting from the financial condition of the Company, including the degree to which the Company is leveraged, debt service requirements and restrictions under loan agreements; and other risks described in the Company's Securities and Exchange Commission filings. 11 12 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES None ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION None ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K a) Exhibits Number Description ------ ----------- 11 Statement re: Computation of Per Share Gain (Loss) 27 Financial Data Schedule b) Reports on Form 8-K None 12 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. December 2, 1997 DEP CORPORATION /s/ Grant W. Johnson --------------------------------------- Grant W. Johnson Senior Vice President, Principal Financial Officer and Chief Accounting Officer 13 14 EXHIBIT INDEX Description Exhibit No. ----------- ----------- Computation of Per Share Gain (Loss) 11 Financial Data Schedule 27 14