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 March 31, 1995 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 April 30, 1995 the registrant had 4,671,707 shares of common
stock outstanding.
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DeSOTO, INC. AND SUBSIDIARIES
INDEX
Page
No.
PART I. FINANCIAL INFORMATION
Consolidated Condensed Statements of Operations
for the Three Months ended March 31, 1995 and
March 31, 1994 3
Consolidated Condensed Balance Sheets as of
March 31, 1995 and December 31, 1994 4
Consolidated Condensed Statements of Cash Flows
for the Three Months Ended March 31, 1995
and March 31, 1994 5
Notes to Consolidated Condensed Financial
Statements 6-7
Management's Analysis of Financial Statements 7-9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 6. Exhibits and Reports on Form 8-K 9
SIGNATURE 10
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DeSOTO, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
March 31,
1995 1994
(in thousands except
per share amounts)
NET REVENUES............................. $ 18,927 $ 23,640
COSTS AND EXPENSES:
Cost of sales......................... 19,443 22,663
Selling, administrative and general... 2,815 3,010
Retirement security program........... (1,682) (1,189)
-------- --------
TOTAL OPERATING COSTS AND EXPENSES....... 20,576 24,484
-------- --------
LOSS FROM OPERATIONS..................... (1,649) (844)
OTHER CHARGES AND CREDITS:
Interest expense...................... 247 134
Nonoperating expense (income)......... (271) (1,059)
-------- --------
Earnings (Loss) before Income Taxes...... (1,625) 81
Provision (Benefit) for Income Taxes..... (603) 30
-------- --------
NET EARNINGS (LOSS)...................... (1,022) 51
Dividends on Preferred Stock............. (83) (77)
-------- --------
Net Earnings (Loss) Available for
Common Shares.......................... $ (1,105) $ (26)
======== ========
NET LOSS PER COMMON SHARE................ $ (0.24) $ (0.01)
-------- --------
Average Common Shares Outstanding........ 4,672 4,657
======== ========
Dividends Declared per Common Share...... - -
======== ========
See accompanying notes to consolidated condensed financial statements.
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DeSOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
March 31, December 31,
1995 1994
(Unaudited)
ASSETS (in thousands of dollars)
Current Assets:
Cash...................................... $ 1,488 $ 1,702
Restricted cash........................... 58 58
Restricted short-term investments......... 379 710
Trade accounts and notes receivable - Net. 9,802 11,848
Inventories:
Finished goods.......................... 3,988 4,331
Raw materials and work-in-process....... 3,860 4,182
-------- --------
7,848 8,513
Prepaid expenses and other current assets. 3,475 3,510
-------- --------
Total Current Assets...................... 23,050 26,341
Restricted Investments...................... 4,725 4,666
Property, Plant and Equipment - Net......... 7,662 7,968
Prepaid Pension............................. 41,140 39,319
Other Non-Current Assets.................... 4,775 4,818
-------- --------
$ 81,352 $ 83,112
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.......................... $ 15,159 $ 14,961
Revolving Credit Agreement................ 8,686 8,381
Reserves and liabilities related to
restructuring programs.................. 1,675 1,884
Waste site clean-up....................... 2,190 2,522
Other..................................... 6,191 5,725
-------- --------
Total Current Liabilities............... 33,901 33,473
Waste site clean-up - long-term............. 6,695 6,744
Post Retirement and Post
Employment Insurance...................... 1,235 1,510
Deferred Income Taxes....................... 12,650 13,392
Long-Term Deferred Gain..................... 3,076 3,175
Redeemable Preferred Stock.................. 3,704 3,569
Common Stock and Other Stockholders' Equity. 20,091 21,249
-------- --------
$ 81,352 $ 83,112
======== ========
See accompanying notes to consolidated condensed financial statements.
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DeSOTO, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS Three Months Ended
(Unaudited) March 31,
1995 1994
(in thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss)............................. $ (1,022) $ 51
Non-cash items:
Depreciation and amortization................. 441 817
Pension income................................ (1,821) (1,250)
Deferred income taxes......................... (603) 299
Amortization of deferred gain................. (99) (81)
Other non-cash items.......................... - 120
--------- --------
Net non-cash items.......................... (2,082) (95)
Changes in assets and liabilities resulting
from operating activities:
Net (increase) decrease in trade accounts
and notes receivable...................... 2,046 (2,730)
Net (increase) decrease in inventories...... 665 2,660
Net (increase) decrease in other
current assets............................ 227 (480)
Net increase (decrease) in accounts payable. 198 1,053
Net increase (decrease) in other liabilities (399) (364)
Net (increase) decrease in other
non-current assets........................ (39) 8
Other....................................... (5) -
--------- --------
Net cash flows from operating activities........ (411) 103
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment.... (108) (156)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions (Payments) under
Revolving Credit Agreement.................. 305 -
Exercise of stock options..................... - 70
-------- --------
Net cash flows from financing activities........ 305 70
-------- --------
Net Increase (Decrease) in Cash and Cash
Equivalents................................... $ (214) $ 17
Cash and cash equivalents at beginning of period 1,702 45
-------- -------
Cash and cash equivalents at end of period...... $ 1,488 $ 62
========= ========
See accompanying notes to consolidated condensed financial statements.
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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 ended March 31,
1995 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 1994 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 March 31, 1995 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 $1,926,000 and $1,889,000 higher than reported at March
31, 1995 and December 31, 1994, respectively.
D. REVOLVING CREDIT AGREEMENT
On December 7, 1994, the Company entered into a revolving
credit agreement with CIT. The agreement provides for up to
$14,000,000 under a revolving credit facility. The funds
available for borrowing are based on a formula which includes
specified percents of accounts receivable and inventory. The
interest rate on the facility is prime plus 1 1/4%. The
Company had $505,000 in letters of credit outstanding on March
31, 1995 that were considered borrowing under the facility.
The Company had $1.7 million available capacity under the
facility at March 31, 1995. Under the terms of the credit
facility, the Company cannot declare or pay any dividends on
any class of stock.
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E. NONOPERATING INCOME
Nonoperating income during the first quarter of 1995 resulted
primarily from royalty income related to technology sold by
the Company in 1990. Nonoperating income during the first
quarter of 1994 resulted from 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.
MANAGEMENT'S ANALYSIS OF FINANCIAL STATEMENTS
Liquidity and Capital Resources
The decrease in restricted short-term investments from December
31, 1994 reflects the payment of an assessment for one of the
waste sites covered by the restricted trust fund.
The Accounts Receivable balance declined from year-end 1994 due
to the impact of reduced sales.
The inventory level declined from year-end due to lower
requirements stemming from lower sales as well as the continued
impact of a product rationalization/inventory control program.
There has been no significant change in the level of liabilities
versus the year-end level.
On December 7, 1994, the Company entered into a revolving
credit agreement with CIT. The agreement provides for up to
$14,000,000 under a revolving credit facility. The funds
available for borrowing are based on a formula which includes
specified percents of accounts receivable and inventory. The
interest rate on the new facility is prime plus 1 1/4%. The
Company had $505,000 in letters of credit outstanding on March
31, 1995 that were considered borrowing under the agreement.
The Company had $1.7 million available capacity under the
facility at March 31, 1995. Under the terms of the credit
facility, the Company cannot declare or pay any dividends on
any class of stock.
The Company expects to utilize additional borrowings under the
new credit facility described above and settlement proceeds from
an environmental insurance carrier to fund its projected 1995
negative operating cash flow. Although the Company believes that
its currently available sources of liquidity will be adequate to
fund its 1995 cash flow requirements, there can be no assurances
that the Company will not experience liquidity problems because
of adverse market conditions or other unfavorable events.
Additionally, as previously announced, the Company in response to
current performance, results of operations, and industry
competition, announced it is exploring various strategies and
alternatives with respect to leveraging its market strengths and
manufacturing capabilities while focusing on preservation and
maximization of shareholder value. The Company also previously
announced it is evaluating various methods of maximizing the
economic benefit of its overfunded pension plan. The results of
this process and the impact on the Company, its liquidity and
operations cannot be predicted at this time.
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Results of Operations for the Three Months Ended March 31, 1995
Net revenues for the quarter decreased approximately 20% versus
the same period in 1994.
The decline can be attributed primarily to the decrease in sales
to three customers. The largest portion of the decline, $2.0
million, related to the loss of certain sales to Lever Brothers.
The first quarter of 1994 included sales to Lever Brothers of
approximately $2.8 million of auto dish gel, fabric softener
sheets, and industrial-size detergents. As previously reported,
Lever transferred its auto dish gel business and domestic fabric
softener sheet business out of DeSoto during the second and third
quarters of 1994.
Sales to both Sears and Kmart were down approximately 25% versus
the first quarter of 1994. Timing with respect to customer
promotions resulted in higher shipments in December 1994 for the
first quarter 1995 promotion in contrast to higher shipping in
January 1994 for the first quarter 1994 promotions. Volume,
promotional pricing and product mix also contributed to the
decrease in sales. There were also increases and decreases of
smaller magnitude with respect to other customers.
Pricing pressure in the marketplace continues to negatively
impact the Company's ability to retain business, as well as the
ability to attract new business.
Lower gross profit resulted from the pricing, product/customer
mix, and volume issues discussed above, the continued escalation
in the cost of corrugated and plastic packaging and unrecovered
fixed costs at certain of the Company's operating plants.
Selling, general and administrative expenses were lower than the
first quarter of 1994. The first quarter 1994 expenses reflected
the operation of the Columbus, Georgia facility, which closed in
March 1994, and the Stone Mountain, Georgia facility, which
closed in July 1994. The lower 1995 expense level also reflects
the continued efforts at cost containment.
Interest expense was higher for the 1995 first quarter versus the
same period last year, due to an approximately $1 million higher
level of borrowings coupled with higher interest rate due to the
increase in the prime rate.
PAGE
9
Nonoperating income during the first quarter of 1995 resulted
primarily from royalty income related to technology sold by the
Company in 1990. Nonoperating income during the first quarter of
1994 resulted from 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(i) United States of America v. Akzo et. al.
In April 1995, the
Company was named in a complaint filed in the United
States District Court for the Eastern District of
Michigan. The complaint, filed on behalf of the U.S.
Environmental Protection Agency, alleges, inter alia,
that the Company and four other parties are
responsible under Section 107 of the Comprehensive
Environmental Response, Compensation and Liability
Act ("CERCLA") of 1980, as amended, for costs the EPA
incurred at the Metamora Landfill site in Lapeer,
Michigan. The complaint also seeks a declaration
under Section 113 of CERCLA declaring the Company
liable for the future costs of the EPA that may be
incurred at this site.
The Company's defense of this action has been
assumed by the firm and its principal shareholder
from which the Company purchased certain assets of
the business, which is alleged by the EPA to be
partially responsible for the alleged contamination
at this site. They have also agreed to indemnify
the Company with respect to the claims asserted in
the complaint.
Item 6. Exhibits and Reports on Form 8-K
a) The exhibits to this report are listed in the
Index to Exhibits on page 11 hereof.
b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the
three months ended March 31, 1995.
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SIGNATURE
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)
Anne E. Eisele
----------------------------
Anne E. Eisele
Senior Vice President
(Principal Financial Officer)
John R. Phillips
----------------------------
John R. Phillips
President and
Chief Executive Officer
May 15, 1995
- ---------------------------------
Date
PAGE 11
DeSOTO, INC. AND SUBSIDIARIES
INDEX TO EXHIBITS
11 - Computation of Fully Diluted Earnings Per Share
27 - Financial Data Schedule
PAGE 12
Exhibit 11
DeSOTO, INC. AND SUBSIDIARIES
COMPUTATION OF FULLY DILUTED EARNINGS PER SHARE
(in thousands except per share amounts)
Three Months Ended
March 31,
1995 1994
-------- -------
Net Earnings (Loss) $(1,022) $ 51
Preferred Dividends (83) (77)
-------- -------
Net Earnings (Loss)
Applicable to Common Stock $(1,105) $ (26)
======== =======
Net Earnings (Loss)
Per Common Share $ (0.24) $ (0.01)
======== =======
Average Common Shares
Outstanding (A) 4,672 4,657
======== =======
Fully Diluted Earnings (Loss)
Per Common Share (B) $ (0.24) $ (0.01)
======== =======
Average Common Shares Outstanding 4,672 4,657
Additional Shares Outstanding
After Application of the
Treasury Stock Method - 127
-------- -------
Total (B) 4,672 4,784
======== =======
(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.
