PAGE 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1994 or
/ / Transition report pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the transition period from ____________ to ____________
Commission file number 1-1915
DeSoto,Inc.
(Exact name of registrant as specified in its charter)
Delaware 36-1899490
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
16750 South Vincennes Road, South Holland, Illinois 60473
(Address of principal executive offices)
708 - 331 - 8800
(Registrant's telephone number, including area code)
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 and (2) has been subject to such filing requirements for the past 90
days. Yes X No
At October 31, 1994 the registrant had 4,656,707 shares of common stock
outstanding.
PAGE 2
DeSOTO, INC. AND SUBSIDIARIES
INDEX
Page No.
PART I. FINANCIAL INFORMATION
Consolidated Condensed Statements of Operations
for the Three Months and Nine Months ended
September 30, 1994 and September 30, 1993 3
Consolidated Condensed Balance Sheets as of
September 30, 1994 and December 31, 1993 4
Consolidated Condensed Statements of Cash Flows
for the Nine Months Ended September 30,
1994 and September 30, 1993 5
Notes to Consolidated Condensed Financial
Statements 6-7
Management's Analysis of Financial Statements 8-10
PART II. OTHER INFORMATION
Item 1. Legal proceedings 11
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 12
DeSOTO, INC. AND SUBSIDIARIES PAGE 3
PART I. FINANCIAL INFORMATION
<TABLE>
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
(in thousands except per share amounts)
<S> <C> <C> <C> <C>
NET REVENUES........................... $ 21,394 $ 28,019 $ 67,320 $ 74,102
COSTS AND EXPENSES:
Cost of sales....................... 20,851 26,164 65,161 68,723
Selling, administrative and general. 2,845 4,307 8,944 14,873
Retirement security program......... (1,183) (1,185) (3,566) (3,572)
-------- -------- -------- --------
TOTAL OPERATING COSTS AND EXPENSES..... 22,513 29,286 70,539 80,024
-------- -------- -------- --------
EARNINGS (LOSS) FROM OPERATIONS........ (1,119) (1,267) (3,219) (5,922)
OTHER CHARGES AND CREDITS:
Interest expense.................... 128 158 436 502
Nonoperating expense (income)....... - (134) (1,303) (6,121)
-------- -------- -------- --------
Earnings (Loss) before Income Taxes.... (1,247) (1,291) (2,352) (303)
Provision (Benefit) for Income Taxes... (465) (485) (877) (120)
-------- -------- -------- --------
NET EARNINGS (LOSS).................... (782) (806) (1,475) (183)
Dividends on Preferred Stock........... (81) (75) (236) (225)
-------- -------- -------- --------
Net Earnings (Loss) Available
for Common Shares.................... $ (863) $ (881) $ (1,711) $ (408)
======== ======== ======== ========
NET EARNINGS (LOSS) PER COMMON SHARE... $ (0.19) $ (0.18) $ (0.37) $ (0.08)
======== ======== ======== ========
Average Common Shares Outstanding...... 4,657 4,821 4,656 4,862
======== ======== ======== ========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
PAGE 4
<TABLE>
DeSOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
September 30, December 31,
1994 1993
(Unaudited)
(in thousands of dollars)
<S> <C> <C>
ASSETS
Current Assets:
Cash............................................... $ 43 $ 45
Restricted cash.................................... 133 183
Restricted short-term investments.................. 246 374
Trade accounts and notes receivable - Net.......... 12,831 11,442
Inventories
Finished goods.................................. 4,412 4,861
Raw materials and work-in-process............... 3,813 5,585
-------- --------
8,225 10,446
Prepaid expenses and other current assets.......... 4,819 12,153
-------- --------
Total Current Assets............................... 26,297 34,643
Restricted Investments............................... 4,927 4,963
Property, Plant and Equipment ....................... 27,671 33,897
Less Accumulated Depreciation ..................... 14,948 18,307
12,723 15,590
Prepaid Pension...................................... 35,968 32,218
Other Non-Current Assets............................. 4,071 4,543
-------- --------
$ 83,986 $ 91,957
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................................... $ 18,882 $ 19,001
Current portion of long-term debt.................. 5,000 2,700
Reserves and liabilities related to
discontinued operations and
restructuring programs.......................... 2,482 4,788
Other.............................................. 7,365 8,571
-------- --------
Total Current Liabilities.......................... 33,729 35,060
Long-Term Debt, less current portion................. - 5,000
Other Long-Term Liabilities.......................... 8,364 8,589
Deferred Income Taxes................................ 14,053 13,922
Long-Term Deferred Gain.............................. 2,931 3,193
Redeemable Preferred Stock........................... 3,437 3,052
Stockholders' Equity................................. 21,472 23,141
-------- --------
$ 83,986 $ 91,957
======== ========
See accompanying notes to consolidated condensed financial statements.
</TABLE>
PAGE 5
<TABLE>
DeSOTO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
1994 1993
(in thousands of dollars)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss).......................................... $(1,475) $ (183)
Non-cash items:
Depreciation and amortization............................ 2,285 3,955
Deferred income taxes.................................... 1,013 1,076
Pension income........................................... (3,750) (3,750)
Amortization of deferred gain ........................... (262) (402)
Net gain on disposal of property, plant and equipment.... - (4,933)
Other non-cash items..................................... 120 -
------- -------
Net non-cash items.................................... (594) (4,054)
Changes in assets and liabilities resulting from
operating activities:
Net (increase) decrease in other current assets...... 6,630 (170)
Net (increase) decrease in inventories............... 2,221 (4,257)
Net (increase) decrease in other non-current assets.. 442 859
Net increase (decrease) in other liabilities......... (2,458) (2,148)
Net (increase) decrease in trade accounts
and notes receivable............................. (1,389) 3,800
Net increase (decrease) in accounts payable.......... (119) 1,580
Other................................................ 1 18
------- -------
Net cash flows from operating activities..................... 3,259 (4,555)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment............... (631) (648)
Proceeds form sale of property, plant and equipment...... - 5,503
Net cash received from waste site escrow................. - 917
------- -------
Net cash flows from investing activities..................... (631) 5,772
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options................................ 70 -
Payment of long-term debt................................ (2,700) -
Additions to long-term debt.............................. - 1,500
Payment of mortgage loan................................. - (2,122)
------- -------
Net cash flows from financing activities..................... (2,630) (622)
------- -------
Net increase (decrease) in cash and cash equivalents......... (2) 595
Cash and cash equivalents at beginning of year............... 45 247
------- -------
Cash and cash equivalents at end of period................... $ 43 $ 842
======= =======
See accompanying notes to consolidated condensed financial statements.
</TABLE>
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DeSOTO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements contain all adjustments (consisting of
normal recurring accruals) necessary for a fair presentation of the results
of operations for the periods indicated.
The results of operations for the three months and nine months ended
September 30, 1994 are not necessarily indicative of the results to be
expected for the full year.
A. ACCOUNTING POLICIES
The reader is directed to the Company's 1993 Annual Report on Form 10-K
previously filed with the Securities and Exchange Commission for details
of the accounting policies followed by the Company.
B. INCOME TAXES
The provision (benefit) for income taxes is computed at the current
estimated effective income tax rate for the year.
C. INVENTORY VALUATION
Inventory at September 30, 1994 is valued at the last-in, first-out
(LIFO) method of inventory accounting. If the first-in, first-out
(FIFO) method of inventory accounting had been used for all of the
Company's inventories, inventories would have been $1,880,000 and
$1,742,000 higher than reported at September 30, 1994 and December 31,
1993, respectively.
D. LONG-TERM DEBT
On March 29, 1994, The Company amended its credit facility. The
termination date of the facility is now January 1, 1995. Effective with
the March 1994 amendment, the Company was required to pay $2,700,000 of
the outstanding debt upon the receipt of its income tax refund for
fiscal 1993 or July 15, 1994, whichever was earlier. The income tax
refund was received on July 8, 1994 and the required payment of
$2,700,00 was made on July 11, 1994. The interest rate on the revolver
was amended to be Harris Prime Rate plus 2%. The Company is required to
meet certain balance sheet and operating result ratios. At September
30, 1994, the Company was not in compliance with the required current
ratio. The Company was also not in compliance with the required minimum
operating income. The Company has requested a waiver of noncompliance
from the bank. On September 26, 1994 the CIT Group (CIT) and DeSoto
signed a commitment letter which, subject to certain preconditions which
have not yet been completed, provided for both parties to enter into a
$14 million, three year revolving credit facility.
<PAGE>
PAGE 7
E. NONOPERATING INCOME
Nonoperating income during the first two quarters of 1994 resulted from
settlements related to insurance and legal issues, as well as the
settlement of an arbitration related to a portion of the business sold
by the Company in 1990 and to royalty income related to technology sold
by the Company in 1990. Nonoperating income in the first two quarters
of 1993 resulted primarily from the sale of a portion of the real estate
at the Company's former headquarters in Des Plaines, Illinois as well as
the settlement of an arbitration related to pension obligations of a
business sold by the Company in 1987 and a favorable insurance
settlement. There was no nonoperating income in the third quarter of
1994 and the nonoperating income in the third quarter of 1993 was
immaterial.
PAGE 8
MANAGEMENT'S ANALYSIS OF FINANCIAL STATEMENTS
Results of Operations for the Three Months Ended September 30, 1994
Net revenues for the three month period ended September 30, 1994 declined
$6.6 million dollars or 23.6% versus the three month period ended September
30, 1993.
This decline can be primarily attributed to the decline in sales to certain
customers. The largest decline related to lower sales to Lever Brothers.
This decline of approximately $2.7 million versus the 1993 third quarter
can be attributed to Lever's transfer of autodish gel business to one of
Lever's own facilities and transfer of certain other products to another
Company. Sales of these products represented $312,000 of DeSoto's third
quarter 1994 sales and $3.5 million of the Company's 1994 year to date
sales. Net revenues for the third quarter of 1993 included $1.0 million in
sales related to the Jean Sorelle business which was sold in December of
1993.
Sales to Sears increased approximately 17% versus the same period in 1993.
The 1994 third quarter included the favorable impact from promotional
activity at Sears during the quarter. This increase was offset by lower
sales to other customers, resulting from the continued pricing pressures in
the marketplace and the negative impact on the private label industry of
continued promotional activity on the part of the national brands.
In addition to the reasons discussed above, product and customer mix also
contributed to the lower net revenues and gross profit for the 1994 third
quarter.
Selling, administrative and general expenses were lower than the same
period in 1993. Certain expenses incurred during the third quarter of 1993
have been eliminated or reduced during 1994. The reduction in expenses
from the 1993 third quarter consists primarily of the reduction in or
elimination of the following costs: expenses related to Jean Sorelle,
expenses related to the two production facilities (Columbus, Georgia and
Stone Mountain, Georgia) shut down during 1994, expenses related to the
Company's former headquarters, legal fees, costs associated with the New
York Office and outside professional fees. The Company continues to focus
on cost control and production efficiency.
Results of Operations for the Nine Months Ended September 30, 1994
Net revenues for the nine months ended September 30, 1994 were down
approximately $6.8 million versus the same period in 1993. This decrease
relates almost entirely to the results of the three month period ended
September 30, 1994.
PAGE 9
The fluctuation in sales to various customers versus 1993 as well as
product mix impacted the nine month sales and gross profit results for the
1994 nine month period. While sales to the Company's largest customers,
Sears and K-Mart, were up for the 1994 nine month period, gross profit
contribution related to both customers declined due to promotional activity
and pricing pressures. The nine month period in 1994 was also negatively
impacted by the loss of Lever business at Stone Mountain effective June
1994, the lower level of Lever business during the first six months of 1994
due to the phaseout period at Stone Mountain and lower volumes than 1993,
the phaseout and ultimate transfer, effective September 1994 of certain
other Lever business.
Selling, administrative and general expenses for the nine month period were
significantly lower than the comparable 1993 period due to the reasons
provided in the discussion of the third quarter results.
The nonoperating income during the 1994 nine month period resulted from
settlements related to insurance and legal issues, as well as the
settlement of an arbitration related to a portion of the business sold by
the Company in 1990. Nonoperating income during the 1993 nine month period
resulted primarily from the sale of a portion of the real estate at the
Company's former headquarters in Des Plaines, Illinois as well as the
settlement of an arbitration related to pension obligations of a business
sold by the Company in 1987 and a favorable insurance settlement.
As announced previously, the Company closed its Columbus, Georgia plant
March 31, 1994 and its Stone Mountain, Georgia plant on June 15, 1994.
Operating results for Columbus are included in the first three months of
1994 and the entire nine month period for 1993. Operating results for the
Stone Mountain facility are included in the first six months of 1994 and
the entire nine month period in 1993.
Liquidity and Capital Resources
The Accounts Receivable balance has increased over December 31, 1993 due to
the impact of payment terms and customer mix represented in the sales of
August and September 1994 versus the mix represented in the sales of
November and December 1993.
The implementation of a product rationalization program initiated during
the first quarter of 1994 resulted in a lower inventory level versus
December of 1993. The lower sales level in the third quarter also
contributed to the lower inventory.
Prepaid expenses and other current assets at September 30, 1994 declined
from the December 1993 level as a result of the receipt
<PAGE>
PAGE 10
of $6.9 million in refundable income taxes during the 1994 third quarter.
The proceeds from the refund were utilized to pay down bank debt as
required and to pay down trade payables and other liabilities.
The reduction in net property plant and equipment resulted from current
year depreciation and the net write-off of assets related to the two
production facilities in Georgia which were shut down during 1994.
On March 29, 1994, the Company amended its credit facility. The termination
date of the facility is now January 1, 1995. Effective with the March 1994
amendment, the Company was required to pay down $2.7 million upon receipt
of an income tax refund. This payment was made July 11, 1994. The
interest rate on the revolver was amended to be Harris Prime Rate plus 2%.
The Company is required to meet certain balance sheet and operating result
ratios. At September 30, 1994, the Company was not in compliance with the
required current ratio. The Company was also not in compliance with the
required minimum operating income. The Company has requested a waiver of
noncompliance from the bank. At July 15, 1994, per the requirements of the
credit facility, as amended March 29, 1994, the amount which may be
outstanding in the form of loans was reduced to $5 million. At September
30, 1994 the Company had $5.0 million outstanding in the form of loans and
$505,000 outstanding in the form of letters of credit. These represent the
maximum amounts which may be outstanding under the amended agreement.
The Company continues to believe it has adequate sources of liquidity and
expects to continue to have adequate sources of liquidity to fund
operations and capital expenditure requirements in 1994. These sources
include current borrowing and proceeds from the sale of assets, including
the potential for the sale/leaseback of the Company's South Holland
facility. On September 26, 1994 the CIT Group (CIT) and DeSoto signed a
commitment letter which, subject to certain preconditions which have not yet
been completed, provided for both parties to enter into a $14 million, three
year revolving credit facility.
During the third quarter and early fourth quarter, the Company received
price increases from several suppliers of packaging materials and
chemicals. Supplier operating capacity and the high demand of export
markets have been the major reasons for increases in packaging components
particularly as relates to corrugated and resins. The Company intends to
partially offset these increases by initiating price increases to several
of its customers during the fourth quarter. The Company also expects
operating improvements and cost reduction programs to contribute to the
offset of the packaging and chemical increases.
PAGE 11
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
During the third quarter, the Company was served with a Summons and
Complaint styled Lundman Development Corporation v. DeSoto, Inc.
94-CV-1007, pending in the United States District Court for the
Eastern District of Wisconsin. The Complaint alleges, inter alia,
that DeSoto violated the Comprehensive Environmental Response,
Compensation and Liability Act, 42 U.S.C. 9601 et seq. with respect
to property the Company once owned in Fredonia, Wisconsin. The
Company has denied the allegations in the Complaint and continues
to investigate if it is liable, or the extent of its liability,
regarding the matter alleged in the Complaint.
During the third quarter, the Company was served with an Amended
Complaint styled West County Landfill v. Raychem International et
al, 93-CV-3170, pending in the United States District Court for the
Northern District of California. The Amended Complaint alleges,
inter alia, that DeSoto violated the Comprehensive Environmental
Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq.
with respect to the West County Landfill in California. The
Company has denied the allegations in the Amended Complaint and
continues to investigate if it is liable, or the extent of its
liability, regarding the matter alleged in the Amended Complaint.
During the third quarter, the Company also received demand letters
with respect to a number of environmental sites relating to former
operations of the Company. The Company continues to investigate
these demands.
Item 6. Exhibits and Reports on Form 8-K
a) The exhibits to this report are listed in the Index to Exhibits
on page 13 hereof.
b) Reports on Form 8-K. There were no reports on Form 8-K filed
during the three months ended September 30, 1994.
PAGE 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DeSOTO, INC.
(Registrant)
/s/ Anne E. Eisele
----------------------------
Anne E. Eisele
Senior Vice President - Finance
(Principal Financial Officer)
/s/ John R. Phillips
----------------------------
John R. Phillips
President and
Chief Executive Officer
November 14, 1994
- ---------------------------------
Date
PAGE 13
DeSOTO, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
11 - Computation of Fully Diluted Earnings Per Share
27 - Financial Data Schedule
PAGE 14
Exhibit 11
DeSOTO, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(in thousands except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
1994 1993 1994 1993
Net Earnings (Loss) $ (782) $ (806) $(1,475) $ (183)
Preferred Dividends (81) (75) (236) (225)
-------- -------- ------- --------
Net Earnings (Loss)
Applicable to Common Stock $ (863) $ (881) $(1,711) $ (408)
======== ======== ======= ========
Net Earnings (Loss)
Per Common Share: $ (0.19) $ (0.18) $ (0.37) $ (0.08)
======== ======== ======= ========
Average Common Shares
Outstanding (A) 4,657 4,821 4,656 4,862
======== ======== ======= ========
Net Fully Diluted Earnings (Loss)
Per Common Share (B) $ (0.19) $ (0.18) $ (0.37) $ (0.08)
======== ======== ======= ========
Average Common Shares Outstanding 4,657 4,821 4,656 4,862
Additional Shares Outstanding
After Application of the
Treasury Stock Method - 109 1 68
-------- -------- ------- --------
Total (B) 4,657 4,930 4,657 4,930
======== ======== ======= ========
(A) Outstanding common stock options and common stock warrants have been
omitted because the effect reduces the net loss per share.
(B) Reflecting the dilutive effect of outstanding common stock options and
common stock warrants under the treasury stock method.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 176
<SECURITIES> 246
<RECEIVABLES> 12,831
<ALLOWANCES> 0
<INVENTORY> 8,225
<CURRENT-ASSETS> 26,297
<PP&E> 27,671
<DEPRECIATION> 14,948
<TOTAL-ASSETS> 83,986
<CURRENT-LIABILITIES> 33,729
<BONDS> 0
<COMMON> 5,619
3,437
0
<OTHER-SE> 15,853
<TOTAL-LIABILITY-AND-EQUITY> 83,986
<SALES> 67,320
<TOTAL-REVENUES> 67,320
<CGS> 65,161
<TOTAL-COSTS> 65,161
<OTHER-EXPENSES> 5,378
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 436
<INCOME-PRETAX> (2,352)
<INCOME-TAX> (877)
<INCOME-CONTINUING> (1,475)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,475)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
